Ruble Slumps to Record as Russia Moves Closer to Free Float

By Vladimir Kuznetsov, Natasha Doff and Ksenia Galouchko

Nov. 4 (Bloomberg) – The Russian central bank's surprise rate hike goes into effect on Wednesday. Policymakers there are struggling to rein in rising inflation, while also trying to shore up an economy battered by western sanctions. (Source: Bloomberg)

The ruble fell to a record as Russia moved a step closer to allowing it to trade freely, abandoning policies that fueled speculation on the currency’s decline.
The ruble slid as much as 3.1 percent against the dollar before trading 2.6 percent lower at 44.7655 by 5:48 p.m. in Moscow. The exchange rate pared declines after the central bank’s First Deputy Governor Ksenia Yudaeva said further interest-rate increases have not been ruled out. Three-month implied volatility for the currency rose to a five-year high, while wagers for higher borrowing costs fell.
Russia spent about $30 billion to shore up the ruble in October as oil’s slide and sanctions over Ukraine worsened the world’s worst currency rout. The Bank of
Russia said today it was abandoning its predictable intervention policy to hamper “speculative strategies” against the ruble. It also freed itself up to sell foreign currency at undisclosed quantities to defend against “threats” to the nation’s financial stability.
“It’s a big step toward floating the ruble,” Neil Shearing, the chief emerging-markets economist at Capital Economics Ltd. in London, said by phone. The ruble is “going to find a floor more quickly than would have been the case under the old framework, and the central bank will spend fewer of its foreign-currency reserves in the process.”
Reserves of the world’s largest energy exporter have fallen $73 billion in 2014 to a four-year low of $439 billion on Oct. 24 as the standoff with the U.S. and its allies over Ukraine worsened, oil prices slid to four-year lows and sanctions created a domestic dollar shortage. Russia’s $2 trillion economy is on the brink of recession.

More Interventions

The currency may stabilize by year-end after the central bank adopted a series of policies, including higher interest rates and 12-month foreign-exchange repurchase agreements, Yudaeva said. There are no limits on the scale of possible interventions given the size of Russia’s reserves, she said.
The central bank will spend $350 million only once a day to support the ruble when it falls past its lower trading band, according to a statement on its website. Under the prior rules, it would pour in $350 million each time the ruble fell past the boundary, before moving the limit by intervals of 5 kopeks and repeating the process. That enabled traders to profit from keeping short currency positions. Russia planned to allow the ruble to trade freely by 2015.
“As a result of the implementation of this decision, the ruble exchange rate will be determined predominantly by the market factors,” the central bank said in its statement. It “will be ready to conduct additional interventions in the domestic foreign-exchange market,” it said.

Oil, Ukraine

The ruble weakened 19 percent versus the dollar in the past three months, the most among currencies worldwide monitored by Bloomberg. A larger-than-expected 150 basis-point interest-rate increase on Oct. 31 failed to stem the rout, leading banks including Goldman Sachs Group Inc. and Commerzbank AG to predict Russia will shift its fixed trading-band policy.
“Making the timing and size of intervention unpredictable should help reduce attractiveness of short ruble positions,” Tatiana Orlova, the chief economist for Russia at the Royal Bank of Scotland Group Plc in London, said by e-mail. “Eventually this should help stabilization, although at the moment the falling oil price and tense geopolitical climate are outweighing its positive influence on the market.”
German Chancellor Angela Merkel said today the European Union should consider expanding sanctions against Russia following “illegitimate” elections in rebel-occupied regions in eastern Ukraine on Nov. 2. Ukraine, the U.S. and EU have condemned the vote as violating the truce signed in September, while Russia says the ballots can pave the way to new talks.

FX Repos

Wagers for rate increases in the next three months declined to 73 basis points today from 150 basis points on Oct. 31, according to data compiled by Bloomberg. The ruble’s three-month implied volatility rose 170 basis points to 21.66 percent, the most among 23 emerging markets tracked by Bloomberg.
The central bank said today it will start auctions of 12-month repurchase agreements this month, in addition to the one-week and four-week facilities introduced in October. Brent crude retreated as much as 1.4 percent to $81.63 a barrel today, down almost 30 percent from its 2014 peak in June.
“The current RUB weakness is mostly oil-driven, in our view, so there is no need for the CBR to fully oppose the price adjustment, while with it having the option to intervene unexpectedly in any amount,” Dmitry Polevoy, the chief economist for Russia and the Commonwealth of Independent States at ING Groep NV in Moscow, said in a e-mailed comment.