Russian capital controls on cards

Investors are prepared to pay the most on record to hold Russian shares abroad amid speculation that President Vladimir Putin’s government will be forced to implement currency controls to arrest the ruble’s decline.

Depositary receipts of OAO Sberbank, the nation’s biggest lender, were at an 11% premium to the equivalent Moscow-traded security yesterday.

OAO Magnit, Russia’s largest retailer, changed hands for 33% more in London than in its home market after currency differences were accounted for.

Traders are protecting themselves against a return to capital controls, eight years after they were abolished, even after Economy Minister Alexei Ulyukayev said Russia isn’t considering such a move.

MSCI said it may consider replacing local shares in its MSCI Russia Index with depositary receipts if restrictions on currency movements are implemented.

“Given ongoing speculation that Russia may introduce some form of capital controls, a number of investors have been scurrying to DRs as a ‘safe haven’,” John Heisel, a Moscow-based vice president of sales and trading at Renaissance Capital Holdings Ltd, said.

“MSCI’s overnight announcement that it could consider switching from local lines in its indices to GDRs exacerbates the issue.”

The ruble plunged as much as 20% on Tuesday, the most since Russia’s 1998 default, after a 6.5 percentage point interest-rate increase from the central bank failed to stem the currency’s decline.

It strengthened 9.4% yesterday, leaving it 46% weaker this year. Investors are also demanding a growing premium to own ruble-denominated bonds traded in Moscow rather than ruble debt that trades on other international markets. Depositary receipts are securities that represent underlying shares in the home country and are traded abroad and in another currency.

Analysts and investors from Schroder Investment Management Ltd to Credit Agricole SA have said that the risk of capital controls is rising as the central bank run out of options to fight the currency rout.

The regulator, which has spent more than $80bn of reserves to stem the drop, said yesterday it is planning measures to help ensure financial stability including giving foreign currency loans backed by non-marketable assets.

Prime Minister Dmitry Medvedev said it makes no sense to introduce “extremely tough regulation” and Russia will rely on market instruments to stabilise the foreign currency market.