Ruble Drops as Volatility Surges to 2-Year High on Oil, Ukraine

The ruble weakened to a record and volatility jumped to the highest in two years amid falling oil prices and concern Russia will toughen its stance over Ukraine.

The currency slid 0.9 percent to 47.3643 against the central bank’s target dollar-euro basket by 6 p.m. in Moscow, 31 kopeks weaker than the level at which the authority intervenes to slow the decline. One-month implied volatility on dollar-ruble contracts rose to 16.0550, the highest since June 2012. Brent slid 1 percent to $85.27 a barrel in London.

U.S. and European Union sanctions over Ukraine have driven the ruble to the worst performance globally in the past three months. Pro-EU parties are set to control Ukraine’s parliament and form a coalition government after trouncing Russian-leaning political forces popular in the nation’s war-torn east. The results come after Russian President Vladimir Putin on Oct. 24 delivered one of his sharpest swipes at the U.S., accusing it of blackmailing world leaders.

The ruble is showing a “negative reaction to the Putin speech,” Dmitry Polevoy, the chief economist for Russia at ING Groep NV in Moscow, said in e-mailed comments. The currency is also falling due to the Ukraine parliamentary vote, which “will determine the policy on Russia,” he said.

The Bank of Russia has spent almost $20 billion of its reserves supporting the ruble this month. The sanctions have triggered a dollar shortage, undermining the local currency and increasing pressure on the central bank for further interest-rate increases, even as the economy teeters on the brink of recession.

Repo Terms

Goldman Sachs Group Inc. analysts lowered their Brent forecast to $85 per barrel from $100, citing oversupplied markets and lower cash costs of production. Oil and natural gas contribute about 50 percent of Russia’s revenue.

“The velocity of the decline has just increased,” Vladimir Miklashevsky, strategist at Danske Bank A/S in Helsinki, said in e-mailed comments. “The ruble follows oil’s every jump, and the central bank doesn’t seem to want to intervene big time.”

The yield on the government’s 10-year ruble bonds rose three basis points to 9.88 percent today. Standard & Poor’s kept Russia’s sovereign ranking at BBB-, its lowest investment grade, and maintained its negative outlook on the debt, according to an Oct. 24 statement.

Record Premium

The amount of rubles commercial banks owe to Bank of Russia via repo operations climbed to 2.77 trillion rubles ($66 billion) today, the highest since July, data compiled by Bloomberg show. Some of the rubles the central bank provides to lenders under repurchase agreements are being converted into dollars, Miklashevsky said.

At the same time, the premium traders are willing to pay for dollars rather than rubles has shrunk from a record reached Oct. 10, data compiled by Bloomberg show. The so-called three-year basis swap strengthened to minus 263 from minus 264 on Oct. 24.

The central bank announced today $3.5 billion of foreign-currency repurchase auctions this week, which aim to ease the shortage of dollar and euro liquidity in the Russian market.

The Bank of Russia allows the currency to trade within a 9-ruble-wide corridor. When the ruble weakens past the boundary, the bank spends $350 million to defend it before shifting the band by 5 kopeks, according to its guidelines. It repeats the process each time the currency falls by 5 kopeks.

Policy makers moved the corridor 35 kopeks on Oct. 24, the central bank said on its website today. That puts the weak end of the band, where the bank intervenes to slow the ruble’s declines, at 47.05 versus the basket.

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