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The value of the dollar topped the psychologically important mark of 40 rubles at the opening of trading on the Moscow exchange on October 6, a new historic low in the ongoing slide of the ruble. The dollar exchange rate jumped by 5 kopecks to hit 40.0535 rubles.

The ruble exchange rate had already come under heavy pressure on October 3, with the Central Bank (CBR) believed to have spent at least $700m supporting the currency. The ruble dropped from RUB44.40 to RUB44.50 against the dual currency Euro-dollar basket used by the central bank to control the value of the ruble, prompting the central bank to raise the upper limit of the trading corridor by 10 kopecks to Rub44.5 on October 6, for the first time since May. 

"We believe that the strong move in the exchange rate last week was due to the lack of FX sellers, exacerbated by rumours of capital controls that were reignited last week," wrote Alfa Bank's Dmitry Dolgin.  "The thin market renders the exchange rate vulnerable to any negative news flow, global or local, despite the current account surplus, which we believe to be high due to falling imports," he added.

Pressure on the ruble stems in part from the declining price of oil, Russia's principle export, despite tensions running high across the Middle East. This implies the price of oil could drop further on tensions easing.  "If you don't think oil prices will rebound, the only thing Russia can do is devalue the ruble," Yerlan Syzdykov, head of emerging debt at Pioneer Investments, told the Moscow Times. 

At the same time, because of Western sanctions on leading Russian state-owned companies including the largest banks, Russian corporates find it nearly impossible to rollover dollar debt, forcing them to buy dollars on the domestic market to pay down debt.  "The central bank is hoarding dollars knowing that if someone is not able to refinance external debt it may have to step in and provide dollars, so they really need to start saving," Syzdykov told the Moscow Times.

Central Bank reserves could plunge

If the Bank of Russia is forced to prop up the exchange rate of the ruble, Fitch forecasts Russia's international reserves would shrink from $465bn on September 1 to $450bn at the end of 2014 and to $400bn at the end of 2015 because of the sanctions.

The financial account of the balance of payments has already experienced a direct negative effect from sanctions equalling 2% of GDP, said Maxim Oreshkin, Director of the Department at the Finance Ministry, representing the price for the closed external markets. 

The fall in oil prices from $110/barrel to $93/barrel initiated a comparable shock: according to the Finance Ministry estimates, a fall by $17 means a reduction in exports of $55bn per year -  about 2% of GDP - on the balance of trade. Therefore, the total negative effect for the balance of payments amounted to about $100bn.

Oil price is the major risk for the 2015 budget, which assumed  a price of $100/barrel, compared to a current price of $93. The budget includes a 11% rise in expenditures and in order to finance the deficit the government will have to borrow RUB800bn on the domestic market and $7bn on the external market, Maxim Oreshkin said. "Any risks for the income and loans will exert pressure on the Reserve Fund,” he said. According to the projected budget for 2015, the government could spend RUB0.5 trillion from the Reserve Fund.

"We are surprised that while the CBR now has the opportunity to lower speculative net capital outflow by raising the key rate, it prefers to finance it with FX interventions instead," wrote Alfa Bank’s Dolgin. "We reiterate that an ahead-of-schedule rate hike would be a positive sign for the market, while failure to do so would indicate that the CBR could be facing obstacles to transitioning to ruble free-float."

The Bank of Russia plans to to let the ruble float free at the beginning of 2015.