Special report: Panic in Russia

, author:

Marcin Lipka

Yesterday the Russian currency lost 10% of its value. This caused a necessity of a special summit of the Russian central bank, on which the interest rates have been raised by 650 basis points, up to 17%. How can further lots of our region go on, and are we endangered with yet another crisis?

The beginning

Throughout recent weeks the matter of the rouble appeared not only in the currency analyses. Decreasing prices of oil and never ending conflict in Ukraine combined with economic sanctions, have caused day-by-day drops on Russian currency's value. However, it is worth noticing, that this sale did not occur in panic, and actually perfectly overlapped with oil's decrease.

Evaluation of rouble in its relation to oil
Evaluation of rouble in its relation to oil. Source: Bloomberg. The chart presents the decrease of evaluation of both Brent oil (yellow line) and rouble (white line). Rate of rouble is presented in RUB/USD format, in order to show better the scale of Russian currency's value decrease.

The central bank also tried not to undertake any rushed actions. Initially, it tried to stop the rouble's depreciation, by using the currency reserves. However, when the monetary authorities have noticed, that decreasing price of oil is a factor, that the rouble weakening too strongly, they have limited themselves to punctual interventions, which would counteract too big fluctuations.

In the meantime we had a few verbal interventions, that were stated by either president Putin, or the members of the government. However, central bank tried to present itself on the market, as an independent institution. Thus, it was not too eager to react on politicians' suggestions.

Despite that the significant part of the rouble's depreciation, is a result of decreasing oil prices and the conflict in the East, there is still another important factor of this situation. It is the appearance of speculation capital. In this case one can assume, that the estimations of central bank were close to the truth, and approximately 8% out of 40% of depreciation, can be credited to the aggressive funds.

Black Monday

The situation on the rouble was suspicious already at the beginning of yesterday's session. Monday's session on oil's market began from the increases, and during the day the appreciation on Brent reached even 3%. At the same time however, the Russian currency was not eager to enforce, and we were going slowly towards the areas of 59 on USD/RUB pair. In the meantime central bank probably conducted one small intervention, that however did not stop the drops.

Depreciation of the Russian currency accelerated in the early afternoon. The market started to speculate, that this clear increase of aversion towards Moscow's market, may by caused by anxiety of new sanctions voted by the American senate. Also, CDS contracts that secure the investor from debtor's insolvency, have crossed 500 points. It means, that the investor must pay annually 5%, in order to secure the bonds issued by Russian Federation.

CDS contracts for the debts of Russia and Poland
Source: Bloomberg. Comparison of CDS contracts for both Russian (white line, left scale) and Polish (yellow line, right scale) debts. The cost of Polish security of debt instruments, is almost 10-times lower than the Russian.

Another intervention occurred after 14.00 of Polish time, when the USD/RUB pair crossed 61. Five percentage depreciation on the increasing oil market, pushed the central bank to sell at least one billion dollars of market's reserves. However, after less than two hours, the rate again reached the level of 61.

Later it got only worse. The decrease of the rouble's value was divided by another intervention, that also did not stop the “slide”, and we have ended the session in the limits of 64. It means, that the Russian currency lost 10% of its value in one day. It was the worst session since 1998, when during the crisis Kremlin was forced to announce bankruptcy.

Monday session on rouble
Source: Bloomberg. Rates of USD/RUB during the session from December 15th 2014.

The USD/RUB pair increased from the level 33 up to 64, from the beginning of this year. It means the loss of almost a half of its value. What is interesting, the rouble is at the moment the weakest currency in the world, and overtook the Ukrainian hryvnia “in the last moment”.

Reaction of central bank and the joke

Just before the end of the session on Moscow's stock market, central bank (CBR) published a statement. It described there the reasons for the decrease of rouble's value, actions that have been undertaken so far, and macroeconomic prognoses. Monetary authorities in Moscow still assume, that the oil prices will return to the level of 80 USD per barrel, by the end of 2017. This should allow to stabilize the economic situation.

In the last paragraph, however, CBR admitted that there is a significant risk of oil's price maintenance on the level of 60 USD per barrel. Should the Brent prices not increase throughout the upcoming quarters, the Russian economy will shrink by approximately 4.5 per cent in 2015, and by 1% in 2016.

However, this was not the end of monetary authorities' communication with the market. On a special night summit, CBR announced, that it will raise the interest rates by 6.5 per cent, to the level of 17%. As the bank wrote on its website, it is supposed to “clearly limit the rouble's depreciation and the risk of inflation”.

Such action will of course have influence on the economy. It will cause a sudden limitation of economic activity in a country, that balances on the edge of recession anyway. At current situation it would probably be difficult to find a different solution, that could stop the avalanche of sales.

The comments of financial institutions (Goldman Sachs, JP Morgan or Citigroup) that appeared so far, evaluate CBR decision positively. However, it is estimated that apart from the increase of interest rates, we may also see a strong intervention, that may amount even 10-20 billion dollars in one day. But without improvement of situation on the oil market, longer appreciation of the rouble will not happen. At most, we can only expect that a few percentage speculation bracket, will be partly taken off.

At this moment we should also remind a joke, that was circling around the market throughout recent weeks. On Putin's 63rd birthday (October 2015) the dollar would value 63 roubles, and the oil's price would decrease to 63 USD. However, this time, reality has clearly accelerated, and even a month did not pass, and both of these assets reached the “witty” levels.

What now?

The market's participants wonder, can the problems of Russia and other oil exporters, be an prophecy of a deeper crisis. The comparison with the end of the 90's, when Asian economies and Russia went through some serious crises, come to mind rather quickly.

This time however, the situation looks differently due to the fact, that these problems concern only inefficient economies exporting oil (Russia, Venezuela or Nigeria). Asian countries learned their lesson from these past events. The currency rates have been released, significant currency reserves have been gathered throughout all these years, and the relation of debt denominated in national currency, decreased from 40% to 26%, according to the data presented by Bloomberg.

Thus, for now we are not endangered by so called 'contagious effect'. Although, of course, in some countries particular branches, that are dependant from the condition of oil exporting countries, will suffer for sure. However, this nervous ending of 2014, may be paradoxical an announcement of relatively successful upcoming quarters, because of the improving sentiments related with cheaper resources and improving condition of the American economy.

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Sp. z o.o is prohibited.

Return to the main list

See also: