Monday, 3 March 2014

Goldman Sees Russia Taming Ruble Losses After Plunge to Record

  Mar 3, 2014 3:58 PM PT

Photographer: Jason Alden/Bloomberg
The ruble’s 10 percent slide this year has been triggered in part by the upheaval in... Read More
Goldman Sachs Group Inc. predicts Russia will contain losses in the ruble as policy makers pledge to curb volatility after ratcheting up interest rates and selling billions of dollars in the currency market yesterday.
Bank Rossii, which ING Groep NV estimates sold as much as $12 billion yesterday, said it will start setting ruble intervention parameters daily, a move that will give the central bank more room to ease swings. Goldman Sachs analysts anticipated a change in tack, writing in a note to clients before the move that Bank Rossii may favor a policy that allows for “discretionary interventions” while predicting the ruble has limited “downside” after sinking to a record low.
Central bankers are stepping up efforts to shore up the ruble as investor demand for Russian assets plummets after President Vladimir Putin’s military forces took over parts of neighboring Ukraine. The ruble weakened 2 percent to 36.5809 per dollar, the biggest decline in 29 months and the worst slump in the world yesterday. Bond yields soared after Bank Rossii raised its key rate 1.50 percentage points.
“We may see the ruble even lower, but at close to 38-39 per dollar, Bank Rossii may stop shifting the corridor and announce” a floor for the ruble, Oleg Kouzmin, an economist at Renaissance Capital Holdings Ltd in Moscow, said by phone yesterday. There has already been a “very significant devaluation” and “they have lots of reserves” to defend the ruble, he said.

Foreign Reserves

Bank Rossii sold between $10.5 billion and $12 billion to support the ruble yesterday, Dmitry Polevoy, chief economist at ING in Moscow, wrote in an e-mailed note. The central bank is scheduled to release data on the size of the sales tomorrow, in accordance with its policy to post figures with a two-day lag.
Russia’s foreign reserves have fallen $40 billion since May to $493 billion, according to data through Feb. 21. ING said the country’s “net” war chest, excluding its sovereign wealth fund, gold and International Monetary Fund reserves, is about $270 billion.
The central bank allows the ruble to float within a corridor against its target dollar-euro basket. Bank Rossii said it will set the amount of market interventions it takes to shift the trading band on a daily basis, giving officials more flexibility in determining how many dollars it sells at a given price level before weakening the ruble’s trading band.
Yesterday, policy makers set the threshold at $1.5 billion, up from $350 million previously, according to the statement on Bank Rossii’s website.

Limiting Swings

“This measure was adopted to prevent risks to financial stability by limiting ruble exchange-rate fluctuations,” the central bank said late yesterday.
The ruble’s 10 percent slide this year has been triggered in part by the upheaval in Ukraine that led to last month’s ouster of President Viktor Yanukovych, a Putin ally, and Russia’s incursion into the Crimea peninsula over the weekend.
U.S. Secretary of State John Kerry arrives in Kiev today, as Ukraine accuses Russia of threatening to seize its war ships in Crimea. Russia denied a report that it had given the ships, located near the Black Sea port of Sevastopol, an ultimatum to give up weapons. The U.S. is preparing sanctions in response to the military offensive, Jen Psaki, a State Department spokeswoman, said yesterday.
Crimea, where Russian speakers comprise the majority, has become the focal point of the Ukraine crisis after protests erupted in November when Yanukovych spurned a trade pact with the European Union in favor of closer ties with Russia. An interim cabinet in Kiev is seeking aid from the IMF and a return to negotiations with the EU.

Rates Surprise

The central bank, led by Chair Elvira Nabiullina, surprised investors yesterday by raising Russia’s key rate to 7 percent from 5.5 percent as part of its efforts to halt the ruble’s decline. The yield on benchmark bonds due 2027 jumped 52 basis points, or 0.52 percentage point, to 8.88 percent, the highest level since June 2012. The Micex (INDEXCF) stock index slid 11 percent to 1,288.81, the biggest drop in five years.
The extra yield investors demand to hold Russia’s dollar-denominated bonds over U.S. Treasuries increased 24 basis points to 268 basis points yesterday, according to indexes compiled by JPMorgan Chase & Co.
The cost to protect against a Russian default for five years has jumped 66 basis points since Jan. 22 -- when unrest in Ukraine spread from the capital -- to 232 basis points. The move has pushed the cost of Russian swaps above those for Romania, Brazil and Indonesia. The gap in prices between Brazilian and Russian credit default swaps is the widest since July 2012.

Retail Clients

Pressure on the ruble may be predominantly coming from retail clients, who are less sensitive to changes in interest rates, rather than institutional investors, according to Goldman Sachs’ research note, which was published before the central bank announced its policy change. The analysts weren’t available for further comment when contacted by Bloomberg News.
The ruble’s decline yesterday, as measured against Bank Rossii’s target basket of dollars and euros, was 1.4 percent, leaving it at a record-low 42.6334 by 6 p.m. in Moscow, when the central bank stops its market operations.
Russia’s currency policy shift aims to “tame risks” to overall financial stability from heightened ruble volatility, including concern that households and companies may switch deposits into foreign currency, ING’s Polevoy said.
“The measures could indeed help to somewhat stabilize the sentiment toward the ruble,” Polevoy wrote in the note. “With the built-up flexibility for setting parameters on a daily basis, the central bank clearly aims at not wasting reserves if the selling pressure sustains for a longer period.”
To contact the reporter on this story: Vladimir Kuznetsov in Moscow at
To contact the editor responsible for this story: Wojciech Moskwa at