Russian Government Tries to Support Volatile Ruble

17 Dec 2014 | Author: | No comments yet »

Panic mood hits Russian economy.

MOSCOW — Russian authorities appeared to be taking drastic action to stabilize their currency on Wednesday, a day after the worst swings since their 1998 financial wipeout. Moscow: Russia’s rouble strengthened on Wednesday after dramatic falls against the dollar in the previous two days but remained extremely volatile and fears of a prolonged crisis remained.Vladimir Putin may have stared down Tony Abbott and his “shirtfronting” threat at last month’s G20 summit in Brisbane, but the tough-talking Russian President is currently wrestling a mounting economic crisis that will really test his famed resilience.Moscow – Russia scrambled on Wednesday to halt a run on the ruble, selling billions of reserves to prop up the currency in the worst economic crisis of President Vladimir Putin’s 15 years in power.

Russia struggled for a second straight day to reverse a rout in the ruble with emergency measures, narrowing President Vladimir Putin’s options in confronting the country’s deepest financial crisis since 1998. With the country’s currency, the rouble, in free-fall in recent days, the economy on the brink of recession and a range of Russian companies saddled with debts they may struggle to pay, the first job of the central bank and government is to restore investors’ faith in what is still the world’s 8th biggest economy by some measures. At the same time, the United States prepared to pile further sanctions on Russia over its actions in Ukraine, which have combined with falling oil prices to produce the perfect storm causing the currency to go into freefall. This confidence started to shake earlier this year with international economic sanctions against the country over its expansion into Ukraine, but has been exacerbated in recent months by the steep slide in the price of oil and other commodities. In the first threat of physical violence apparently related to the recent cyberattack on Sony Pictures, people claiming to be the hackers vowed in an online message Tuesday that there would be attacks similar to those of Sept. 11, 2001, at movie theaters that show the studio’s forthcoming comedy “The Interview.” See full story.

After opening down around 3.0 percent at around 1000 GMT on Wednesday, it rallied slightly, trading at 66.05 to the dollar, from 67.88 on Tuesday evening, and at 82.20 to the euro from 85.15. “This is a very dangerous situation. Small volumes were capable of moving the market sharply in either direction. “Today it’s likely exporters are helping the rouble, though we haven’t seen them or the central bank,” said Pyotr Neimyshev at Otkritie bank in Moscow. The ruble’s down 52 percent this year. “Certainly, there’s a panic in the markets,” Vitaly Isakov, a money manager at Otkritie Asset Management in Moscow, said by e-mail. “The Finance Ministry is sending a signal that it sees the ruble as seriously undervalued and that at current levels it makes sense to sell dollars.” Putin is preparing for his annual news conference tomorrow in one of the most difficult moments of his 15-year rule. After digging into official foreign currency reserves to arrest the most recent lightning depreciation, Russia’s central bank on Monday hiked the main short-term interest rate to 17 per cent, from 10.5 per cent.

The economic stability that’s at the core of his support is under siege as confidence wanes in the currency and the country careeens toward recession. The situation poses a major challenge for President Vladimir Putin whose popularity, based partly on providing stability and prosperity, is at risk from a rouble decline that is damaging Russia’s credibility among investors. It was the largest single rate rise since the country’s 1998 debt default, caused by a toxic combination of falling commodity prices, political upheaval, massive fiscal imbalances and broader investor unease in the wake of the Asian asset sell-off of 1997. Prime Minister Dmitry Medvedev voiced confidence that Moscow can contain the crisis. “The country has the currency resources to achieve… all the economic and production goals that you have set,” he told a televised emergency meeting of ministers and industry leaders. Putin holds his annual end-of-year news conference on Thursday, when he will field questions from a studio audience as well as from television viewers around Russia, and is expected to comment on the rouble’s decline.

Still healthy reserves of more than $US400 billion and a relatively light calendar of interest payments on sovereign debt means Russia is still a long way from needing a lifeline from creditors or multilateral lenders such as the International Monetary Fund. Russian newspapers warned in editorials Wednesday that the country was steps away from a full-blown bank run. “The central bank has buried the ruble” was the headline on the front of Moscow’s Nezavisimaya Gazeta.

However, analysts say companies indebted in foreign currencies, including those directly exposed to sinking commodity prices, could come under stress. The time has come for a definitive choice, doing nothing won’t solve the problem.” The ruble rose 3 percent to 65.632 per dollar by 3:24 p.m. in Moscow. The ministry said in a statement that it believed the ruble was now deeply undervalued. “One should suppress emotions and not create panic,” said the head of Russia’s upper house of Parliament, Valentina Matvienko. He said he expected more volatility in Russian debt markets as buyers demanded ever-higher premiums with sellers also struggling against the traditionally thin liquidity at this time of the year.

However, this was not a re-run of 1998. “A sovereign debt default is unlikely, bearing in mind the strength of the government balance sheet and the relatively low amount of debt maturing next year,” said Mr Ellis. The currency “continues to weaken as the Bank of Russia seems set on preserving reserves, thus allowing the local currency to settle naturally into a certain range,” wrote Alfa Bank analysts. Bets on future price swings for the ruble are the highest in the world after the currency’s three-month implied volatility jumped 17 percentage points this month to 45 percent today. Although the ruble’s value was more stable on Wednesday than in previous days, the situation remained fragile, and many investors still seemed to have lost trust in the country’s basic institutions.

As the rouble loses value, Russians are desperately hedging against further falls by buying hard currency or spending on consumer durables before relative prices – and inflation – gallop away. The higher interest rate will crush lending to households and businesses and deepen Russia’s looming recession, according to Neil Shearing, chief emerging-markets economist at London-based Capital Economics Ltd. In the dark of night early Tuesday, the Russian central bank imposed a steep interest rate hike to stem the currency losses — to little initial effect. Many Russians are shielded from the scope of the crisis even as they convert their rubles to hard currency and foreign companies such as McDonald’s Corp raise prices. The bank on Wednesday said it had conducted $1.961 billion worth of forex market interventions on Dec. 15, the latest date for which it has provided data.

In contrast, the ministry has $7 billion available to sell, according to its statement today, a sum that pales in comparison to the central bank’s $416 billion cash pile. It pared declines following comments from Economy Minister Alexei Ulyukayev, who denied speculation the government would impose restrictions to stop Russians from converting cash into dollars. To contact the reporters on this story: Ksenia Galouchko in Moscow at kgalouchko1@bloomberg.net; Vladimir Kuznetsov in Moscow at vkuznetsov2@bloomberg.net; Olga Tanas in Moscow at otanas@bloomberg.net

They stood at $416 billion at the beginning of the month, down $80 billionthis year. “If the economic troubles lasta long time, this will be a new situation that Putin’s regime has never been in,” said Denis Volkov at Moscow’s independent Levada polling agency. Retailers said Tuesday thatsome Russians were rushing to purchase large-ticket items such as cars and appliances before they are marked up to new exchange rates.

Russia’s economy was already in trouble before the Marchannexation of Ukraine’s Crimean Peninsula and subsequent support for pro-Russian rebels in eastern Ukraine. On Tuesday, Russian Foreign Minister Sergei Lavrov reversed a call for Kiev to cede more power to Ukraine’s regions, a basic Russian demand since pro-Moscow Ukrainian PresidentViktor Yanukovychwas toppled inFebruary. “This is for Ukrainians to decide,” Lavrov said in aninterviewwith France 24 television. “We’re not suggesting federalization, we’re not suggesting autonomy,” he said, although he and Putin have repeatedly proposed exactly that. Kerry praised the Russian moves on Tuesday, raising the prospect of an easing of sanctions. “There are signs of constructive choices,” Kerry told reporters in London, referring to the cease-fire. Tuesday’s rate hike — the largest since 1998 — was intended to cap inflation and encourage Russians to keep theirs avings in rubles instead of switching them to foreign currencies. Russian companies are indebted to Western banks, but analysts said Tuesday that even a partial default would probably not on its own deal a grievous blow to the global system.

But the ruble sell-off that started Monday — a day in which oil prices were flat — was sparked by worries about a complicated, opaque transaction late last week in which the centralbank appeared to have printed currency to indirectly finance oil giant Rosneft, analysts said. Salaries aren’t growing, but everything else is rising,” Zhana Krivarogova, 55, said outside a central Moscow store.“Right now things are hard, but you know the Russian people — we’re used to it.”

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