Ruble Sinks Most in 6 Years on Ukraine as Bank of Russia Tested

The ruble headed for the biggest drop in six years as fighting in Ukraine flared and speculators tested the central bank’s willingness to support the currency.

The ruble weakened 3.6 percent to 46.6115 per dollar by 7:20 p.m. in Moscow, the sharpest retreat since January 2009. The yield on 10-year government bonds rose 11 basis points to 10.09 percent.

The currency extended declines as Ukraine’s government said there were 26 outbreaks of fighting today between its forces and pro-Russian separatists in the country’s east, while the rebels said the Kiev government had launched a major offensive there. The increase in tension comes as traders try to determine how far the ruble will have to fall before the Bank of Russia steps in with a large currency intervention to shore it up.

“As reports of new fighting come from Ukraine, the geopolitical card is again on the table,” Vladimir Miklashevsky, an economist at Danske Bank A/S, said by e-mail. “The ruble needs to find a new equilibrium in such an uncertain environment.”

Russia has been embroiled in a standoff with the U.S. and its allies since it annexed Crimea from Ukraine in March, triggering a selloff in the nation’s assets. The central bank spent the equivalent of about $30 billion in October to support the ruble, which is down 29 percent versus the dollar this year, the most among 31 major currencies tracked by Bloomberg.

New Policy

The crisis is coming to a head after Ukraine and its allies accused separatists of undermining peace efforts with Nov. 2 elections in Donetsk and Luhansk. Rebels in the self-proclaimed Donetsk People’s Republic said government forces have begun a large-scale offensive in violation of a two-month-old truce.

The Bank of Russia moved a step closer to allowing the ruble to float freely yesterday by abolishing a predictable intervention policy, while including a caveat reserving the right to sell foreign currency unannounced.

Under the new exchange-rate rules, the central bank spends $350 million just once a day to support the ruble when it falls past its lower trading band. Previously, it would pour in $350 million each time the ruble fell by 5 kopeks past the boundary before moving the band again and repeating the process, enabling traders to profit from keeping short currency positions.

“Yesterday’s pledge to intervene in large amounts, if deemed necessary, is yet another target for the market to take aim at,” Tom Levinson, the chief foreign-currency and interest-rate strategist at Sberbank CIB in Moscow, said by e-mail. “The market has been intent on uncovering the thresholds for the Bank of Russia policy action.”

Corridor ‘Irrelevant’

The currency retreated 3.5 percent to 51.6944 against the central bank’s dollar-euro basket, almost 6 percent below the lower limit of the official trading band. The corridor is now “largely irrelevant or just a reference point” after yesterday’s policy shift, Sberbank CIB analysts said.

Foreign-currency reserves of the world’s largest energy exporter slid for 11 straight weeks to a five-year low of $428.6 billion as of Oct. 31. The country, which relies on oil and gas for about half of budget revenue, is draining reserves as oil’s tumble to four-year lows curtails its earnings.

“I used to have a feeling that the central bank might start to act at 45 rubles per dollar, but they didn’t come true,” Yury Tulinov, an analyst at Rosbank in Moscow, said in e-mailed comments. “I’m not going to guess further. The central bank has after all given no guidance exactly so that it’s less predictable to speculators.”

The central bank said yesterday it was leaving determining the exchange rate “predominately” to the market, while saying it was ready to carry out additional interventions when needed. Commerzbank AG and Standard Bank Group Ltd. estimate it could take a one-time intervention of as much as $10 billion to catch traders off-guard and reverse the rout.

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