Russia interest rate hike fails to halt ruble crash

The ruble plummeted into a freefall, losing as much as 19% as panic swept across Russian financial markets after a surprise interest-rate increase failed to stem the run on the currency.

The ruble sank beyond 80 per dollar, a record low, before rebounding after Alexei Ulyukayev, the economy minister, denied speculation that the government would turn to foreign-exchange restrictions to stop Russians from converting money into dollars. Bonds and stocks also tumbled, with the RTS equity gauge dropping the most since 2008.

“I am speechless,” said Jean-David Haddad, an emerging-market strategist at OTCex Group in Paris. He said policy makers need to consider currency controls as “the last solution” to halt the ruble’s 52% plunge this year. “What a failure for the central bank.”

The scope and speed of the ruble’s retreat indicates policy makers are losing control of the situation as the six-month, 49% tumble in oil robs President Vladimir Putin of the hard currency he needs to sustain an economy that’s faltering under the weight of international sanctions.

The selloff in Moscow is spreading across the globe, prompting nervous investors to pull money from other developing nations amid concern Russia’s financial struggles and the tumble in oil signal a global economic slowdown. A Bloomberg gauge tracking the top emerging-market currencies fell to the lowest since 2003 while equity benchmarks in Dubai and Saudi Arabia lost more than 7% each and Indonesian policy makers propped up the rupiah after it fell to a 16-year low. Bank of England Governor Mark Carney said that he sees the potential for contagion effect from emerging markets into developed ones that could have “some impact” on financial stability.

Russian government officials including central bank governor Elvira Nabiullina and Anton Siluanov, the finance minister, got together to discuss ways to combat the crisis, less than 24 hours after the 6.5 percentage-point rate increase, to 17%, could only stoke a brief rally in the ruble before it began falling.

In addition to denying that officials were considering currency restrictions, Ulyukayev, the economy minister, told reporters after the meeting that “of course” rates should have been raised earlier. No policy changes were announced.

Speculation has been growing that foreign- exchange controls were imminent, with firms from Schroder Investment Management to Skandinaviska Enskilda Banken, or SEB, saying they were possible. Per Hammarlund, chief emerging-markets strategist at SEB, said the government could make it harder for depositors to swap cash into hard currency or require exporters to bring some earnings into the country.

While there were no initial signs of Russians lining up in downtown Moscow to pull their ruble deposits and buy dollars, Khanty-Mansiysk Otkritie Bank, the retail arm of the country’s second- largest private lender, said demand for foreign currencies was three to four times the daily average.

Even after rebounding late in Moscow, the ruble was still down 14% this week and 27% this month. It earlier fell the most in a day since the country defaulted and devalued the currency in 1998. Ten-year ruble bond yields jumped 3.05 percentage points to 16.28% while the annual cost of insuring against a debt default climbed to 5.55% in the credit-default swaps market, the highest since 2009. “Our traders are informing me that we see no bids to buy rubles,” SEB’s Hammarlund said.

“I thought 17% would give them at least a month of breathing space. We next have to look at the experience in 1998 to 1999. We are also one big step closer to capital controls.”

Three-month implied volatility, a gauge of expected swings in the currency, surged 11 percentage points to 56% yesterday, the highest level since 2005, according to data compiled by Bloomberg.

The swings are proving too much for some brokers. FXCM, the third-largest currency broker for retail clients, will stop offering the ruble versus the dollar and begin closing its customers’ trades. Alpari UK stopped clients from taking new positions, while Saxo Bank and Gain Capital Holdings’s Forex.com said they planned to demand higher deposits from clients to deal in the currency.

The currency’s plunge was exacerbated by concern that policy makers were pumping more rubles into the economy to prop up state companies like oil giant OAO Rosneft, measures that effectively give investors additional money to buy dollars. OAO Rosneft’s CEO Igor Sechin said suggestions the company’s bond sale contributed to the ruble’s decline were a “provocation” and reiterated that it has no plans to convert the 625bn rubles it borrowed last week into dollars. Rosneft sold 57% of the $118 bn of foreign currency it earned in the first nine months of the year, he said.

But central bankers are pushing rubles into the financial system to prevent credit from seizing up and deepening the slowdown in an economy that’s already sinking into recession nine months after Putin invaded Ukraine’s Crimea peninsula. The central bank alotted 3.1tn rubles in seven-day loans, known as repos, at an auction yesterday, the second-biggest such operation since May.

The ruble has kept plunging even after the central bank raised rates 11.5 percentage points this year, including yesterday’s surprise move, and spent over $80bn in the foreign- exchange market, draining reserves to a five-year low. Russia is sinking into stagflation as a recession looms at the same time that inflation soars to a three-year high. The economy may shrink as much as 4.7% next year if oil, Russia’s biggest export, averages $60 a barrel under a “stress scenario,” the central bank said. Net capital outflows may reach $134bn this year, more than double last year’s total.

“It’s very hard to stop the panic since everyone is betting against the ruble,” Vadim Bit-Avragim, a money manager at Kapital Asset Management in Moscow, said. “The central bank was too late with its move. Without oil and the economy stabilising, the ruble won’t rise.”