bne IntelliNews -
During the worst of the ruble's plunge
in recent weeks traders were completely wrong-footed: they expected the Central Bank of Russia (CBR) to step in and defend the national currency's value, but it did nothing.
"Where is the CBR?" lamented Tim Ash, head of emerging markets research at Standard Bank, as the ruble fell past the psychologically important RUB50/$ mark. Surely the central bank would not let the ruble fall further? It did.
Currency traders are waking up to the fact that when the central bank said the ruble was free floating it meant it. The lesson of 2008-09 when the CBR burnt through $200bn of reserves managing the ruble lower has been learnt: there is no point defending the indefensible. With oil prices in free fall there is no point trying to maintain the "old" exchange rate, especially when it remains unclear how low the oil price will fall. Better to preserve the country's hard currency reserves to bolster banks and help corporates pay off their international debt once the dust settles, than defend some arbitrary exchange rate.
"We maintain the view that ultimately there is no ‘red line’ for the ruble – a point at which the Central Bank of Russia might start to defend the currency heavily. After the CBR made the ruble free-floating in November 2014, some market participants assumed the authorities would not let the exchange rate weaken below RUB48/$ or RUB50/$, for example. However, the ruble is much weaker than RUB50/$ and this is not happening; nor do we think it is likely to happen at any particular level. Recent evidence suggests to us that the CBR was defending the ruble at RUB60/basket on 1 and 3 December 2014, with the first irregular interventions under the new framework, but we think this level or practice could easily change at any time in the near future," Oleg Kouzmin, chief economists at renaissance Capital, wrote in a note in December.
The fall has been so steep in such a short space of time it has come as a shock, but the Russian people are long used to wild swings of the currency and inured to the change. They are not panicking. There was no mass rush to buy currency during the worst of the tumble; and many Russian have already anticipated a devaluation, buying expensive cars, apartments and washing machines earlier in the year. They are taking this currency crisis in their stride from their long experience with crises.
That is not to say the CBR is doing absolutely nothing. The bank spent $700m on December 1 – the largest intra-day intervention since 1998 - to cap what it called "excessive" volatility, but it didn’t stop the ruble falling another 6% that day.
"We believe the magnitude of this fall was the trigger that prompted the CBR to intervene; however, we would hesitate to consider the intervention as a guide to new CBR practice. At the time the ruble was moving towards RUB54/$ and RUB60/basket, but we do not think these levels represent any ‘red line’ (the currency has in any case already gone beyond that line). The CBR’s logic is undisclosed, and we think its approach might vary from time to time," writes Rencap.
And this erratic intervention policy is by design. This year the bank spent an estimated $100bn managing the ruble lower. The bank expanded the ruble corridor by 5 kopeks each time it spent more than $350m, creating a predictable one-way bet for Russian banks, which borrowed from the CBR and simply used the cash to speculate on the FX market. Now the CBR's moves have become unpredictable, it has reintroduced risk to currency speculation and so helped the ruble to find a natural equilibrium, instead of being the plaything of speculators.
Russian President Vladimir Putin highlighted the problem by warning that ruble speculators would be "punished" without giving any details, during his state of the nation speech on December 4. Putin is clearly adding some "political guidance" to the CBR's more direct action, in case Russia's bankers are not clear about what is expected of them.
Rencap asked the pertinent question: Why is this happening?
"Russia is facing a new environment, given the drop in oil prices and Western sanctions, and we think December 2014 could be the most challenging period to come. First, we think oil prices could hit new lows in December. We believe the market is now pricing the rouble exchange rate on the basis of Brent oil prices at $60/bl. Second, Russia faces another peak in external debt redemptions in December 2014, of around $19bn, on our estimates. Finally, the market is still adjusting to the new environment of lower oil prices and very limited CBR intervention in the market, which significantly increases volatility," Kouzmin says.