Commerzbank Cutting Russia Debt Worsens Bond Rout as Ruble Falls

Russian bonds fell for a third day and the ruble retreated as Commerzbank AG recommended selling the nation’s local debt as sliding oil prices make it less likely that the central bank can press on with interest-rate cuts

The decline in five-year OFZ bonds lifted the yield three basis points to 11.26 percent, set for the highest level in a month. The currency weakened 0.5 percent to 65.8560 per dollar by 6:08 p.m. in Moscow, a six-month low as President Vladimir Putin said he discussed the currency on Tuesday with Prime Minister Dmitry Medvedev.

Assets in the world’s biggest energy exporter are under pressure as oil trades in a bear market, diminishing the scope for deeper reductions in borrowing costs after the Bank of Russia lowered them by 600 basis points this year. Brent oil fell for a fourth day, dropping 0.4 percent to $48.53 a barrel, headed for the lowest since January.

“Russia remains the most exposed in eastern Europe” to lower oil prices, Simon Quijano-Evans, chief emerging markets strategist at Commerzbank, said by e-mail. “It would be difficult to see rate cuts as long as oil prices continue to fall in the short term.”

The ruble has lost a quarter of its value in the last three months, in lockstep with the retreat in Brent crude oil. It was the third-worst performer among 24 emerging-market currencies tracked by Bloomberg on Tuesday. Russia’s gross domestic product contracted 4.6 percent in the second quarter.

“The ruble, having found no support in the shrinking economy, has fully submitted to the trend in the oil price,” Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow, said by e-mail.

The ruble’s slide has quickened the pace of inflation in July to 15.6 percent, prompting derivatives traders to switch from betting on rate cuts in the coming three months to seeing an increase.

Forward-rate agreements are trading 33 basis points above the benchmark three-month MosPrime rate. Five-year government bond yields are 25 basis points above the key rate, the biggest premium since January.