by Chris Becker
The massive intervention by the Russian Central bank, where it raised rates from 10.5% to 17% yesterday, has failed to arrest the collapse in the ruble, Russian stocks and bonds. These moves have also set off shockwaves in other emerging markets, with Dubai and Saudi Arabia stock markets falling over 7%, although oil prices have slowed their descent (although Brent crude fell 2% and below $60USD a barrel).
Overnight the ruble collapsed nearly 20% accelerating its falls for this year as confidence disappeared – chart from Bloomie:
The ruble hit 80 to the USD but also has crashed past 100 against the Euro and other currencies.
From the Moscow Times:
The ruble’s tumble in recent days has sparked heavy criticism of Russia’s authorities from investors and lawmakers.
“The fall of the ruble and the equity market is not only a reaction to the low price of oil and sanctions but to a distrust of the government’s economic measures,” former Finance Minister Alexei Kudrin wrote on Twitter in the early hours of Tuesday morning.
Others said that the Central Bank and her chairwoman Elvira Nabiullina had disastrously miscalculated the situation.
“Lack of action had left the stability of the very financial system at stake. I am not sure whether Nabiullina can survive this,” analyst Ash said.
“It has only to be a matter of time before the rating agencies respond with ratings downgrades, likely to junk status.”
The RTS Index fell 12%, led mainly by a run on bank stocks, and 10-year bond yields jumped 3% to over 16%. While these moves may not have the same impact as the debt crisis in 1997, the Russian Central Bank is warning of a deep recession if oil prices remains at the $60 barrel level forecasting a near 5% retraction.
The talk on the street is capital controls are next as net capital outflows have doubled to over $130 billion as risk flows out of Russia.
What will make Putin blink here? Or OPEC for that matter?
More analysis from Gunnamatta (who lived and worked in Russia):
I was working in a bank in the UK on Black Wednesday and recall it very well. The thing I recall most was a currency trader and an economist I was working with having a chat and the economist describing the initial selloff after Lamont jacked up rates that morning, before the GBP was booted from the ERM as …
‘The point the credibility of the market system meets the credibility of the political system. The British economy is dead. The markets know it is dead. The markets know that keeping the pound inside the ERM is what has killed it. Lamont has just said he would make it deader. The market is making the call that there are no shades of dead.’
Something to note I suppose is that after Black wednesday the UK economy boomed. After 1998 the Russian economy boomed (sure it was oil propelled but it boomed). As I keep pointing out the Russian economy is being crushed, but it is running a budget surplus, a current acount surplus and can fund its existing debt position for some time.
The only way this comes into question is if confidence in the rouble is shattered to the point where international loan covenants are being breached (I would say we are there), and even then, as I have referred to previous, the level of dollarisation of the Russian banking system is such that it could fund a lot of calls.
The other side of all this is that Rusia – the economy not the financial system – is arguably the biggest growth prospect for Europe. The US can drive the Russian economy into the turf but it is also driving the Euro economy in a similar direction (particularly unless they can talk the Germans around to some form of stimulus).
There is a massive degree of dollarisation on the streets of Moscow (and most large Russian cities). ATMs dispense RUB and USD (and can often do EUR as well – though that has largely ceased since the EUR went into a coma). That dollarisation could be easily ended by imposing capital controls, but I dont think they would be credible with the Russian public and would only encourage a black market (which has generations of precedents).
The Economy Minister said even last night that they still werent thinking about capital controls.
What I think drove the selloff yesterday was the bond issue of Rosneft (as posited by Sergei Guriev in the FT, which indicated that the corruption in the Russian decisionmaking process is still looking after mates – in charge of Rosneft in this case).
I dont see any easy way out of this. But not just for Russia, as i think what is in play will be highly likely to have significant effects outside Russia. Part of the reason for the rebound (after RUB went to 80) is that by any measure the selloff has taken Russia to the level of being a screaming buy, even if crude dives another 25%.
To go back to the point about markets deciding dead is a finite state (as opposed to a series of increasingly dead states) the nature of that means that Russians may easily be telling themselves ‘we arent dead yet’ or (more disturbingly) ‘we have been dead before and come back’. That would be given added impetus by the idea that they are being hammered deliberately by the US (I think that straightforward enough) and the view that the Sauds are in it to cream the US fracking community, with the additional thought that if the Sauds can knock out the frackers and rebound (as the Sauds need to) then the Russians can have a piece of that action too as long as they hang together now.
That isn’t to say they will (and I dare say the ‘middle class’ in Moscow which was the core of the protest movement against Putin a couple of years ago will be thrown to the wolves with USD denominated debts and RUB based investments) but that the attempt would be fairly plausible and I would guess attempted – of course it all leads back to a severely heavy state at a certain level.
For sure the Russians people will be all too aware of the corruption in their leadership. The problem at this point becomes a geopolitical one, because the Russian public, (and arguably even many/most Ukrainians) would be of the view that the Ukrainian leadership is even more pernicious, and Putin standing his ground on Ukraine and the way they handle the Eastern Ukrainians (and particularly Crimea) will be popular not just on grounds of ethnicity (Eastern Ukraine) or territorial history (Crimea) but will be particularly popular (as I have pointed out at length previously) because of very widespread views in Russia that global capital would love to get its hands on Russian oil and wouldn’t hesitate to break Russia if it thought it could, and the view that VVP (as corrupt as he may well be) has at least prevented Russia from being raped by that global capital set the way it was being in the late 1990s and the way Ukraine’s oligarchs have continued to do…..(so that even if the US could get rid of Putin they wouldn’t be likely to get anything better in terms of popular, credible with the Russian public, Russian leadership)