The rouble smashed through resistance to an all-time low of 65.5 to the dollar, falling a jaw-dropping 11%, in a crescendo of selling on Monday, as oil prices continued to slide and markets braced for a likely default in Ukraine.
In the bleakest official forecast yet from Moscow, the Russian central bank warned that the country could see a 4.5 per cent to 4.7 per cent contraction in GDP next year if oil prices remained at $60 a barrel.
Since the start of the year, the rouble has lost more than 45% of its value against the dollar. Russia‘s central bank has tried unsuccessfully to stabilise the currency, buying roubles in the markets and raising its main lending rate to 10.5%.
After a day of turmoil dominated by fears that a crashing global oil price would devastate Russia’s energy-dominated economy, an after-hours meeting of the central bank today in Moscow decided emergency action was needed to prevent the rouble’s collapse. The bank said the increase in borrowing costs – which will deepen Russia’s recession if sustained for a prolonged period – was needed to end currency depreciation and to combat inflation.
Russia’s central bank has hiked the country’s benchmark interest rate to 17%, just days after raising it to 10.5%, in a bid to stop a full-blown currency crisis. The shock move – Bank of Russia’s sixth increase this year – takes rates to heights not seen since the country’s default in 1998, and “is aimed at limiting substantially increased rouble depreciation risks and inflation risks”.
“This is definitely a step in the right direction. The real interest rate right now is significantly positive, 7 to 8 percent,” said Jorge Mariscal, chief investment officer for emerging markets at UBS Wealth Management in New York. “This should make it more difficult to short (the rouble). I think it shows they are really concerned about the speed of the decline in the rouble.”
“The bottom line is that oil prices have to stabilize for the rouble to find a bottom but this move is what the central bank should be doing,” said Jorge Mariscal, chief investment officer for emerging markets at UBS Wealth Management in New York.
Crude prices remained under pressure on Tuesday after OPEC once again said it will not cut oil output despite fears of massive oversupply, and a UAE official nixed holding an emergency meeting of the producer group to support prices.
On the diplomatic front, a bill passed by the U.S. Congress after Russian markets closed last Friday set out tougher sanctions on Moscow, putting pressure on Russian assets. U.S. President Barack Obama has not signed the bill into law and has opposed further sanctions on Russia unless Europe joins in, but the draft law nevertheless soured the market mood.
Russian companies remain largely shut out of global capital markets as a result of sanctions imposed by western countries and face a looming credit crunch as they need to refinance their debt. Rosneft, for example, last week raised RUB 625bn from local banks ahead of a foreign bond payment due at the end of the week.
The outlook for Russia‘s economy has darkened considerably since the summer as capital flight has soared due to broad-based risk aversion to Russian assets and sanctions restricting Russian companies’ access to international capital markets. “Unless the situation in Ukraine improves and we see a big change in oil prices it’s not trivial to go in and buy Russia,” said Bhanu Baweja, head of emerging market strategy at UBS in London.
“The Ukraine situation and resulting sanctions have led investors to question how exactly Russian corporates will be able to refinance their debts without access to their usual investor base,” said Yannik Zufferey, head of the Swiss fixed-income team at Lombard Odier Investment Managers.