Panic pummels Russian financial markets

Tõnis Oja
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Desperate try by Russia’s central bank to halt the free fall of rouble fell flat – following the sharp base interest rise yesterday morning, the currency strengthened just for a few hours, to thereafter totally tumble.

By the afternoon the rouble lie in shambles, having shed nearly fifth of value thus dropping to 80 roubles for a dollar and 100 for a euro.

The currency crisis looking bad on Monday, the central bank council decided at an emergency meeting to raise base interest by 6.5 percent to 17 percent. This is the sharpest interest rate rise since 1998 when Russia opted not to redeem its bonds and to devalue the rouble. The interest rate rise was the more dramatic that only last week it had already been lifted by a percent.

«I’m speechless,» Bloomberg was told by Jean-David Haddad, emerging markets strategist at the French investment firm OTCex. «This is a central bank failure. Today (yesterday – edit), Russia ought to announce capital controls. That’s the last chance,» he added.

Even a midnight TV appearance by central bank president Elvira Naibullina failed to help – one where she explained that the interest rates rise was first and foremost to curb the overly rapid inflation, not to halt the fall of the rouble. As the cause of rouble’s fall, she cited the low oil price and Western sanctions which abruptly hindered access by Russian companies and banks to capital.

«We think that according to all parameters the rate of the rouble is undervalued – both by economic conditions and the tax balance. The rate’s restoration to a level fundamentally substantiated will take time,» she said.

Oil price decides

The central bank chief is right, of course. What affects the rouble most is the price of oil.

«As long as the major oil price drop continues, the central bank will have great difficulty stabilising the rate of the rouble,» read a short comment to clients by chief Danske Bank economist Lars Christiansen who once became known to Estonians by his very pessimistic prognoses regarding the booming Estonia – which later proved true. According to him, the latest interest rate rise was the first major step regarding a change of strategy, as up to now they just let the rouble fall.  

«If the markets were unimpressed by such interest rates, then the only option they (the central bank – edit) have left is to intervene the market to the tune of ten billion dollars a day,» commented Natalia Orlova, chief economist at Russia’s largest private bank, the Alfa Bank. «They are on the market daily.»

«Raising the base interest is okay, but it happened too late. Had they raised it as much the last Thursday, and increased the intervention (central bank intervening in markets – edit) volume, that would have calmed the markets,» Aleksei Kulakov, derivatives transactions chief at Russian top dozen bank Promsvjazbank told the Wall Street Journal.

«Well it can’t get worse. The last step in the perfect storm may be capital controls installed,» Swiss private bank Julius Bär developing markets strategist Heinz Rüttimann told the Financial Times.

Shares also tumbled on Moscow stock market. The dollars based Russian stock index RTS fell 12 percent; the roubles-based Micex index did an 8.1 percent drop.

Bank run fear

A major loser was Russia’s largest bank Sberbank which shed $2.1bn of market value in a day. Investors fear that the panicking Russians will start drawing their deposits out of banks.

«The core of the sales spree is the banking sector,» investment company EC Elbrus Capital Investments director Anton Hmelnitski told Bloomberg. «The economy is obviously in decline, possibly leading to bank runs.»

Up to now, central bank had been cautious with interest rate rises, as all signs point to Russian economy having gone into decline. By interest rise, the economy would be hampered even further.

«With halting the rouble’s fall a priority, no-one thinks about what to do with the economy. These are extraordinary measures, by which the central bank is trying to avoid the worst,» investment bank Renaissance Capital analyst Oleg Kuzmin e-mailed the clients.

On Monday, Russia’s central bank announced that if oil stays at $60 per barrel, the Russian economy will shrink by 4.7 percent in 2015. And, should oil fail to get dearer again, the 2016 GDP drop would be 1.1 percent. 

Due to the weakening rouble, Russian companies have an increasingly hard time to pay back foreign loans. Russia’s public debt is relatively small and reserves amount to $430bn.

By the ordinary people, the downturn is mostly felt as inflation which should rise to ten percent.  

The chaos on Russian financial markets has already also affected the developed markets. For three banks most closely linked to Russia – Société Générale of France, Italy’s UniCredit and the Austrian Raiffeisen Bank – nearly three billion euros of market value evaporated.

Already, bets are made at Wall Street on Russia (but, perhaps, also Venezuela) going insolvent. Insurance against Russian bond default rose to highest levels since 2009, said CNN.