Ruble Risks Betrayal at Home in Nation’s Rush for Dollars

By Vladimir Kuznetsov and Natasha Doff

Photographer: Andrey Rudakov/Bloomberg

Customers pass a service desk at a bank branch inside the headquarters of OAO Rosbank... Read More

More Russians are beginning to keep their cash in dollars and euros as the ruble tumbles to records amid central bank efforts to maintain control over the pace of the decline.
The number of people with foreign-currency holdings rose in September from August, Bank of Russia said in its inflation report published Oct. 10. OAO Sberbank, Russia’s biggest lender, had its first drop in retail deposits since May last month, while the premium to swap rubles for dollars climbed to a record at the end of last week, data compiled by Bloomberg show.
Investors are betting the most in six years
that central bank Governor Elvira Nabiullina will have to raise interest rates after what Alfa Bank estimated at $6 billion of intervention failed to prevent the ruble from reaching all-time lows every day last week. While the economy risks sinking into a recession amid U.S. and European Union sanctions over the crisis in Ukraine, policy makers must underpin confidence in the ruble.
“Once the mindset of a crisis sets in, it becomes a self-fulfilling prophecy,” Neil Shearing, an economist at Capital Economics Ltd. in London, said by phone on Oct. 10. “Residents start to anticipate further weakness in the ruble and shift out of rubles and into hard currency and that precipitates further weakness.”

Psychological Levels

Russians have been moving savings out of the ruble as President Vladimir Putin’s standoff with the U.S. and its allies worsened with the March annexation of Crimea. The ratio of deposits in foreign currencies rose to 19.4 percent in August from 17.4 percent in December, according to central bank data.
While September figures aren’t yet available, the ruble tumbled during the month as the U.S. and EU imposed new penalties on companies including OAO Rosneft, Russia’s biggest oil company, and Sberbank. The lender’s deposits fell 33.9 billion rubles ($840 million) in September, data showed Oct. 7.
The depreciation, the world’s steepest since June, has gathered momentum this month as oil’s drop below $90 a barrel dimmed the outlook for Russia’s budget revenue. The currency weakened past 40 per dollar for the first time last week.
“The ruble is breaking through psychological levels,” Fedor Bizikov, a money manager at GHP Group in Moscow said by phone on Oct. 10.

2008 Crisis

Russians also moved their cash out of rubles when the 2008 financial crisis sent the currency sliding as oil prices tumbled below $40 a barrel. The ratio of bank deposits held in foreign currencies more than doubled in six months to 34 percent by January 2009, central bank data show.
Even with the past month’s drop, Brent averaged $106 a barrel in 2014. Ruble weakness is also boosting proceeds of state energy exporters since they earn in dollars, helping the government more than double its budget surplus in the first eight months.
Funding conditions for Russian companies are worsening as they face $55 billion of debt maturities this year, central bank estimates show. The rate on a three-year ruble-dollar basis swap reached negative 300.5 basis points on Oct. 10, signaling traders are willing to pay a record premium for dollars.
Nabiullina could slow the flight by raising borrowing costs, according to Natalia Orlova, the chief economist at Alfa Bank in Moscow. She held the key rate at 8 percent last month following 250 basis points of increases since March. The next scheduled rate meeting is Oct. 31.

‘One-Way Street’

“As the market sentiment is still dominated by the fears of capital controls, we believe a hike in the interest rate would be a good signal,” Orlova and analyst Dmitry Dolgin wrote in an e-mailed note Oct. 10.
Wagers for rate increases in the next three months soared more than 100 basis points last week to 168 points on Oct. 10, the most since October 2008. The Bank of Russia is trying to balance inflation three percentage points above its 5 percent target and an economy nearing recession.
Russian reserves are at a four-year low after dropping $57 billion in 2014 to $454.7 billion last week. Brent traded near a four-year low, Russia’s 10-year bonds had their worst week since August and the ruble fell 1.4 percent versus the dollar-euro basket.
“With oil prices this low, it’s a one-way street for the ruble,” Lars Christensen, chief emerging-market analyst at Danske Bank A/S in Copenhagen, said by phone. “The central bank is trying to fight the speed of it, but they also know that they can’t fight it forever and the market knows that.”