Russia lurched towards a financial crisis evoking parallels with its 1998 crash, as the rouble plunged more than 11 per cent on Tuesday despite a dramatic midnight interest rate rise by the country’s central bank.
The rouble turmoil showed signs of spreading to global markets, as investors piled into haven assets and German bond yields dropped to a record low.
“Russia is in full-blown currency crisis,” said Alexander Moseley, fund manager at Schroders. “It is difficult to see the underlying source of stress ending”.In a sign of the pressure policy makers are under, Sergey Shvetsov, deputy governor of the central bank, said the situation was “critical”: “I couldn’t imagine even a year ago that such a thing would happen — even in my worst nightmares,” he said at an event in Moscow.
Russian shoppers rushed to buy goods before the currency lost more value, while some banks ran short of cash as customers stocked up on dollars and euros.
At one point on Tuesday the rouble tumbled to Rbs80 against the US dollar before recovering to Rbs70. It has fallen more than 50 per cent since the start of the year, reviving memories of the 1998 crash when Russia defaulted on its domestic debt - though its public finances and reserves are in a much healthier state than they were 16 years ago.
The currency’s rout comes in the run up to Fed chairwoman Janet Yellen’s last monetary policy meeting of 2014. If she sends a strong signal on rate rises next year it could extend a rout in emerging markets by sucking capital back into the US.
The rouble’s slide has been driven by declining confidence in the central bank, western sanctions over Russia’s intervention in Ukraine, and a plunging oil price, that on Tuesday dipped below $60 for the first time since July 2009.
It presents a huge problem for president Vladimir Putin, whose 14-year rule has long been associated in the minds of most Russians with a stable currency and rising living standards.
As the currency continued to slide, prime minister Dmitry Medvedev summoned senior central bank and government officials for urgent talks on the country’s financial and economic situation.
Investors and Russian citizens are now looking to an annual press conference by Mr Putin for signals on how he plans to deal with the crisis — and in particular for any signs that he may soften his stance on Ukraine in an attempt to ease sanctions.
The failure of Russia’s central bank to stem the currency’s sharp declines with an emergency interest rate rise of 6.5 points to 17 per cent raised speculation that Moscow could introduce capital controls.
“It cannot get much worse for Russia. The final step for the perfect storm would be the introduction of capital controls,” said Heinz Rüttimann, emerging market strategist at Julius Baer.
“Investors are pricing in that Russia is going to experience quite a nasty recession, which will feed through to other countries,” said Andrew Milligan, head of global strategy at Standard Life Investments. “There are understandable worries in what are fast becoming very illiquid markets ahead of Christmas.”The rouble’s fall ricocheted through global financial markets, encouraging a flight to quality among investors. Yields on 10-year debt issued by Germany dropped to 0.56 per cent for the first time, while equivalent Japanese bond yields hit a record low of 0.36 per cent.
Moscow’s MICEX stock index fell by more than 8 per cent during the day before recovering, with shares in Russia’s biggest bank, Sberbank, down by 17 per cent and Gazprom down 10 per cent.
Some Russian bank branches were left short of foreign currency as ordinary citizens rushed to convert money from roubles to dollars and euros — in a move that bankers and trades say has been a major driver of the Russian currency’s plunge. One Sberbank branch on Tsvetnoi Bulvar in central Moscow had only $100 left in cash by 7pm on Tuesday, a cashier told the FT, after starting the day with $100,000.
Standing in a queue of a dozen people at another branch of Russia’s largest bank, Galina, a retiree, explained that she was waiting to change her pension into dollars. “None of us know what’s happening. We’re all worried that the currency will keep falling,” she said.
Analysts said the central bank’s hefty interest rate rise was a textbook response to the crisis, but may have been too late.
Lars Christensen, chief analyst at Danske Bank, said that as long as oil prices continued to drop the central bank would have a “hard time” stabilising the rouble. He added that the rate rise marked the central bank’s “first major change of course” from its recent strategy of letting the rouble float freely.
Russia’s benchmark 10-year yields increased by more than 2 percentage points to 15.36 per cent, the highest since 2007, while its dollar-denominated equivalent gained 36 basis points to 7.55 per cent.
While years of prudent fiscal policy and a war chest of $400bn in foreign exchange reserves have helped Russia fend off an outright financial crisis, the rouble rout has greatly increased the burden of more than $600bn in external debt held by banks and companies. Little of this debt can be refinanced because western sanctions have largely locked Russian borrowers out of US and European capital markets.
Oleg Kouzmin, economist for Russia and CIS at Renaissance Capital in Moscow, said the rouble weakness “puts the domestic financial markets under heavy pressure, including the domestic banking sector”. He said the central bank’s drastic interest rate rise was likely to be followed by massive direct interventions.
“On our rough estimates, if the CBR sells around $20bn of dollar liquidity in the remainder of the month and [the] oil price stays stable, the rouble might be able to appreciate by 10 to 15 per cent compared to current levels,” he said.