No Trigger for Russia as Ruble Sinks to New Lows on Oil Rout

  • Central bank governor sees no risks to financial stability
  • Ruble plunges to record as oil extends drop from 12-year low

Bank of Russia Governor Elvira Nabiullina is leaving it to the market to judge when a ruble collapse will pose a threat to financial stability and force policy makers into action.

So far it hasn’t, and the currency is close to its “fundamental levels,” Nabiullina said in an interview on Wednesday. Other top officials also took the crisis in stride, with President Vladimir Putin saying that changes in the exchange rate are actually opening up “additional opportunities” for some businesses.

That’s done little to ease the ruble’s descent to an all-time low as oil extends its decline. Unlike a year ago, when the central bank responded to the currency crisis with an emergency 6.5 percentage-point interest-rate increase in the middle of the night, this time it’s standing pat. Fourteen months into a free-float regime and with an economy at risk of its longest recession in two decades, Nabiullina may be counting on the ability of Russians to ride out another currency shock without allowing it to snowball.

“Nabiullina intended to reassure the market,” said Piotr Matys, a strategist for emerging-market currencies at Rabobank in London. “If oil continues to fall and -- as a result of that -- the ruble continues to depreciate rapidly, the central bank will have to face a huge dilemma of raising interest rates at the time when the economy is still in a recession.”

No Interventions

The central bank, which hasn’t sold foreign currency since late 2014, has pledged to avoid interventions unless the ruble’s swings threaten financial stability. The situation in the financial industry is so far under control, with no sign of deposit outflows, Bank of Russia Deputy Governor Vasily Pozdyshev said Wednesday in televised comments. The central bank has the tools to avoid a currency collapse, according to Kremlin spokesman Dmitry Peskov.

“The exchange rate is indeed changing, it’s volatile, but it’s far from being a crash,” Peskov told reporters Thursday. “The central bank is watching the situation quite closely and is analyzing it.”

If policy makers are looking past the damage from oil’s collapse, that may be because the ruble’s decline is tamer than the nosedive in the price of crude. While the ruble, which slumped to a record for a second day on Thursday, has dropped more than any other emerging market currency in 2016 with a depreciation of almost 13 percent, Brent crude has slumped by a steeper 26 percent.

That’s driven Russia’s earnings from each barrel of oil it sells to near the lowest since 2010 and forced the government to start considering austerity measures to avoid draining its rainy-day fund used to cover shortfalls in the budget. Russia relies on oil and natural gas for almost half its fiscal revenue.

Right Course

“The central bank is correctly executing its mission,” former Finance Minister Alexey Kudrin said in an interview in Davos. “The floating exchange rate has managed to adapt to the fundamental indicators of the economy. Most importantly, it’s partly protected the budget and export-oriented companies.”

The Russian currency weakened 3.6 percent to 84.45 against dollar as of 3:18 p.m. in Moscow after sinking as much as 4 percent earlier. The Russian currency would need to fall to 90 against the dollar for the central bank to step in, according to a Bloomberg survey.

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A “do-nothing” economic policy is of less appeal to Oleg Deripaska, the billionaire president of aluminum producer United Co. Rusal who’s a longtime critic of the central bank. The devaluation is a more serious challenge for Russia than inflation, he said in a televised interview on Wednesday.

‘Readjust Quickly’

“A commodities-based model of development is over,” he said, adding that companies must seize the opportunity provided by the weak ruble to boost exports. “That’s the only opportunity for the country to readjust quickly and begin growth in two quarters.”

The Bank of Russia has kept its benchmark at 11 percent for the last three meetings, with consumer prices growing at more than three times its 4 percent target. First Deputy Governor Ksenia Yudaeva said last week that the central bank doesn’t “completely” rule out a rate increase as it looks to meet its inflation goal. It next reviews borrowing costs Jan. 29.

‘Least Preferred’

“Any form of interventions might be the least-preferred option from the central bank’s perspective, given its preference for having as much FX reserves as possible,” Dmitry Polevoy, chief economist for Russia at ING Groep NV in Moscow, said in a report. “And a rate hike might be politically difficult, even though we think the central bank will have room to choose without big pressure from the government officials.”

Forward-rate agreements are signaling 10 basis points of increases in borrowing costs in the next three months, after indicating as much as a full percentage point of easing in November.

“If the situation deteriorates significantly and rapidly, raising concerns about financial stability, a rate increase is the most probable response from the Bank of Russia,” said Liza Ermolenko, a London-based analyst at Capital Economics Ltd. “A rate hike is an extreme-case scenario, it will take a much sharper fall in the ruble for that. The key implication of recent ruble moves is that rate cuts will be delayed.”

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