Loans Fueling Ruble Surge Start to Plateau as Unwinding Looms

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Russia’s central bank is reining in the foreign-currency loans that fueled the world’s biggest currency rally.

The total amount of outstanding dollar repurchase agreements has fallen to about $35 billion from a peak of $39.4 billion in mid-April after policy makers curbed supply and quintupled the premium they charge over the London interbank offered rate, central bank data compiled by Bloomberg show.

As the recovery in oil and cease-fire in Ukraine boosted confidence in Russia, banks used the dollar loans intended to help them and their clients repay foreign debt to instead bet on Russian assets and pocket the extra interest. The ruble’s 21 percent surge against the dollar, beating all major currencies this year, threatens to cut Russia’s oil revenue and prompted warnings from officials that the rally was overdone.

“It’s negative for the ruble,” Yury Tulinov, the head of research at PAO Rosbank in Moscow, said by e-mail Wednesday. “Of course, it’s a drawn-out process, it’s not a sudden turnaround in all the trends.”

Were the central bank to end its lending program immediately, outstanding loans would decline to $25 billion in June and stay at that level until the end of the year, before falling to about $5 billion by April 2016. The tighter lending conditions are making banks wary about pursuing carry trade wagers that have returned 27 percent this year, the most in the world, according to data compiled by Bloomberg.

Eurobond Collateral

“Banks are very cautious about the prospects of further ruble strengthening,” Irina Lebedeva, an analyst at UralSib Capital, wrote in a research note on Wednesday. “They’re even ready to return a part of their FX debt before the central bank instead of rolling it over.”

Policy makers now offer 12-month dollar funding at 250 basis points above Libor, compared with as low as 50 basis points in December. The central bank cut the amount of foreign currency repo loans of various maturities it offered this week to $3.6 billion from $7.5 billion in the first week of April.

Russia’s Eurobonds, used as collateral on dollar and ruble repos, may also decline amid reduced demand, Rosbank’s Tulinov said. Sovereign dollar notes have been the third-best performers in emerging markets this year, handing investors a 13 percent return, data compiled by Bloomberg show.

The yield on Russia sovereign Eurobonds due March 2030 was little changed at 3.74 percent by 10:54 a.m. in Moscow. The ruble declined 1 percent against the dollar to 50.78, paring the weekly gain to 1.8 percent.

Because of the increased cost of the dollar funding, Eurobonds give a carry of 1.4 percent to 1.8 percent, which only allows banks to break even when transaction costs are factored in, according to Sberbank CIB analysts Alexander Kudrin and Alexander Golinsky.

“We can no longer really consider foreign currency refinancing as the key market driver,” they said in an e-mailed note Wednesday.