The ruble’s plunge to a record low shows the Russian central bank needs to do more to prove to investors that it’s serious about defending the currency. After the Bank of Russia shifted its intervention policy yesterday, saying it would offer as much foreign currency as it deemed necessary, the ruble only briefly pared losses before resuming declines.
The currency closed the day down 2.6 per cent to 44.8748 per dollar. While the change in tack gives Russia a better chance to stem the ruble's 27 per cent decline this year, the losses suggest that investors betting against the currency may only back off when policy makers actually ramp up their intervention, according to Commerzbank AG and Standard Bank Group Ltd.
The two banks estimate it could take a one-time intervention of as much as $10 billion to catch traders off-guard and reverse the rout. “The central bank needs to show its teeth,” Simon Quijano-Evans, the head of emerging-market research at Commerzbank, said by phone from London. “It seems local markets are not too convinced.”
The Bank of Russia revamped its currency policy after analysts at banks, including Goldman Sachs Group Inc., said the previous strategy was too predictable to deter speculators.
Russia spent about $30 billion to shore up the ruble in October as oil’s slide and economic sanctions over President Vladimir Putin’s incursion into Ukraine worsened the worst rout among 30 major currencies tracked by Bloomberg this year.
Falling reserves
The ruble retreated 2.9 per cent versus the central bank’s dollar-euro basket to 49.9214 in Moscow yesterday after breaching 50 for the first time. Burning through foreign reserves to defend the rule is futile as long as the political standoff over Ukraine continues, according to Jim O’Neill, the former Goldman Sachs economist who coined the BRIC moniker in 2001 to highlight the rising economic power of Brazil, Russia, India and China.
Russia’s foreign reserves have fallen $73 billion in 2014 to a four-year low of $439 billion. “It depends on what their own strategy is versus Ukraine,” O’Neill, a Bloomberg View columnist, said in an e- mail. “If they know they are going to provoke more hostility, it would seem pretty much a waste of time to lose their foreign reserves.”
New policy
Under the new rules, the central bank will spend $350 million only once a day to support the ruble when it falls past its lower trading band, a step further toward a free floating currency. The central bank will sell additional foreign currency at undisclosed quantities periodically without announcing it in advance. Previously, the central bank poured in $350 million each time the ruble fell by 5 kopeks past the boundary before moving the band again, allowing traders to profit from keeping short currency positions and betting on further depreciation. Banks including Goldman Sachs and Commerzbank had anticipated a shift from the fixed trading-band policy as the central bank’s larger-than-estimated 150 basis point interest- rate increase on Oct. 31 failed to stem the ruble rout.
The currency may stabilise by year-end, First Deputy Governor Ksenia Yudaeva said yesterday. There are no limits on the scale of possible interventions given the size of Russia’s reserves, she said.
Rebound prospects
While currency traders will test the resolve of the central bank in the coming days, the ruble may rebound when policy makers do decide to act, Clemens Grafe and Andrew Matheny, Moscow-based analysts at Goldman Sachs, wrote in an e-mailed research note yesterday. “The ruble is only likely to stabilise once the central bank of Russia makes use of its flexibility and intervenes in size,” the analysts wrote.
Ad-hoc interventions must be between $5 billion and $10 billion to “provide a shock to the market and satisfy foreign- currency demand,” Commerzbank’s Quijano-Evans wrote in a note yesterday. That “should be FX supportive, in our view, but look for short-term volatility.”
Traders are anticipating more price swings in the ruble, which is already the world’s most volatile currency.
Bloomberg
