‘Black Tuesday’ in Russia as rouble slide sparks currency crisis

‘Black Tuesday’ in Russia as rouble slide sparks currency crisis

Sharp rouble depreciation revives fears of 1998 crisis, forcing the Central Bank of Russia to take tough decisions with limited results so far. Investors should prepare for further restrictions and economic recession.

On December 15 the rouble sharply lost 10% of its value against the US dollar, sparking panic moods on currency and stock markets. It was new record daily drop since September 1, 1998, when rouble lost 18%.

December 16, late at night Central Bank of Russia (CBR) raised the key interest rate from 10.5% to 17% in trying to curb the rouble’s depreciation. In the beginning of 2014 the key rate was at 5.5% – since then CBR raised it 7 times. Despite CBR’s actions, that day has become known as ‘Black Tuesday’ bringing a 15% drop in the currency’s value at peaks.

The two primary reasons for the depreciation are falling oil prices and financial sanctions, which have put significant pressure on Russian economy – an issue GRI has covered previously. In December the Brent oil price continued to slide moving below $60 a barrel on Monday the 15th, while risks of new sanctions increased as US Congress passed new bill regarding the conflict in Ukraine.

In addition to these trends, there are three factors which triggered the panic sell:

First, investors worried over Rosneft’s needs for debt repayment of which 80% is denominated in foreign currencies. Past activities of the state controlled giant – acquisition of TNK BP for $55 bln and a contract with China with $65 bln gradual prepayment (in fact a loan with falling oil as a pledge) – created financial pressure on the company.

Rosneft used its connections to receive a RUB 625 bln loan with rates lower than sovereign bonds. The funds were provided by the CBR via state controlled banks. Thus, Rosneft decreased its need in currency sales supporting USD deficit. It also provided additional rouble liquidity for banks which used it to buy currency on the market, giving the rouble a push downward. Still, Rosneft’s CEO – Igor Sechin – furiously rejected any direct involvement.

Second, fears of capital controls sparked on Friday, December 12, when a draft law on limited capital controls was submitted in Russia’s parliament. President Vladimir Putin has since rejected that Russia will implement capital controls. Yet, the CBR has few instruments left but to restrict the movement of capital.

Finally, markets have growing increasingly worried over the CBR’s perceived inactivity. On December 12 it raised key rate only by 1 percentage point to 10.5%, which did not meet market expectations. The midnight raise to 17% between Monday and Tuesday added to market panic, while the inability to curb excess volatility and restrict provision of rouble liquidity damaged CBR’s credibility.

A plummeting rouble and falling oil prices forced CBR to reassess its economic forecasts. Now the Bank estimates that in the negative scenario (oil price at $60 per barrel) Russian GDP will contract by 4.7% in 2015.

Its decision to raise the key interest rate will obviously increase bank rates and yields of RUB-denominated instruments, but at current volatility levels only highly risk-prone foreign investors will enter the market. The stock market experienced panic sell-off with MSCI Russia index nearly hitting its 2009 lows in USD.

Other very likely effects of current events are a credit crunch and series of defaults among small banks and indebted domestic companies. Additionally, exporters with sizable foreign currency balances, like Surgutneftegaz with $33 bln in cash, face the risk of being “kindly asked” to use their cash cushion either for pushing the rouble down or for buying bonds of cash-stretched state-owned companies like Rosneft.

The Russian economy enters uncharted territory with lots of extremely high risks for investors.

About Author

Alexey Kobylyanskiy

Alexey Kobylyanskiy currently works for a leading Russian mining company. He previously worked for the political risk insurance arm of the World Bank. He also has experience working for Russian regional government bodies and as an international election observer during the 2010 presidential elections in Ukraine. Alexey holds an MA in International Political Economy from Fordham University and an MA in International Relations from St. Petersburg State University, Russia.