Danske, Sputnik, Deka Comment on Russia Capital Control Concerns

The ruble tumbled past the level at which the central bank said it would step in to support the currency on concern Russia will introduce capital controls. Analysts and investors comment on the prospects for such a move.

Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, in e-mailed comments:

“If the intentions are true, this is an investor’s nightmare.” Russia’s financial system “is already under big pressure from financial sanctions.”

Alexander Losev, CEO of Sputnik Asset Management, by e-mail:

“If they introduce something like that, you can say goodbye to the dream of the ruble as a regional and then a global reserve currency. This contradicts everything the central bank did before. Capital controls will erase the job the central bank and the government have done in promoting the ruble not only as a national currency, but as a currency used in settlements with international partners, as well as all efforts in achieving ruble stability and inflation targeting.”

Peter Schottmueller, who helps manage $17 billion in debt as head of emerging markets fixed income at Deka Investment in Frankfurt, says by e-mail:

“Bank of Russia is supposed to float the ruble next year, so that may change.” Capital controls “definitely mark a significant change” in Russia’s economic policy. Controls are “very negative for your investments in the local currency,” while foreign involvement in OFZ bonds “has already dropped.”

Dmitry Dorofeev, a fixed-income strategist at BCS Financial Group in Moscow, by e-mail:

“In the medium-term it’s positive for the ruble, but investors are concerned that tough rules may be introduced. The central bank is most likely to choose a way of soft limits and requirements for exporters, state-controlled first and foremost. As for the mandatory revenue sale on the domestic market, 25% of revenue looks possible.”

Neil Shearing, chief emerging-markets economist at Capital Economics, says in e-mailed note:

“Authorities are becoming increasingly concerned about the economic damage inflicted by the continuing crisis in Ukraine.” For now, capital controls “remain a measure of last resort,” he said. A “more likely response will be to raise interest rates.”

Shearing forecasts a 50 basis-point increase in the key policy rate to 8.50 percent at next month’s central bank meeting.

Konstantin Nemnov, head of fixed income at TKB BNP Paribas Investment Partners in St. Petersburg, which oversees $4.5 billion, says by phone:

“The possibility that investors may encounter issues pulling capital out of Russia is adding nervousness to the OFZ market.” The possible plan is “negative” and will “spook” foreign investors. He said he doesn’t expect a “massive exit” from OFZ ruble bonds unless constraints are approved.

Stanislav Kopylov, a money manager at UralSib Asset Management, which oversees 45b rubles, says by phone from Moscow:

“Capital outflows should sharply increase now. When you’re threatened like that, you need to urgently pull out cash.”

Slava Smolyaninov, chief strategist at UralSib Financial Corp. in Moscow, comments by phone:

“Capital control threatens the ‘investability’ of Russia. Certain types of capital control can result in the liquidation of Russian Exchange Traded Funds if investors aren’t able to settle in rubles. Capital control is a direct result of the international sanctions and lower oil price. When people hear ‘capital control,’ the knee-jerk reaction is to sell.”

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