Rouble left at mercy of sanctions as Russian defences show cracks
Brent’s retreat from $80 has also put the currency under pressure
Moscow: Russia’s central bank kept borrowing costs unchanged, pausing despite persistent inflation risks after a surprise hike last month.
The key interest rate will stay at 7.5 per cent, according to a statement on Friday.
Earlier, on the eve of Russia’s interest-rate decision, markets got a taste of rouble traders’ nerves.
Merely an appearance that US National Security Adviser John Bolton was striking a conciliatory tone on sanctions on Wednesday was enough to catapult the Russian currency from losses to an intraday gain of almost 1 per cent.
But once it became clear his comments from Azerbaijan weren’t so optimistic, the speculation Washington might hold off on further penalties rapidly evaporated, leaving the currency down for a second day against the dollar.
The rouble’s sensitivity also raises the question of just how much the measures of support deployed at the last gathering have accomplished.
Halting a foreign-currency buying programme and surprising markets with the first rate hike since 2014 contributed to the rouble’s 4 per cent rebound since the September decision. But as much as half the appreciation came from a weaker dollar, according to ING Groep NV, and the currency remains vulnerable.
“The central bank’s decision to put the foreign currency interventions on hold might have absorbed some Russia-specific pressure on the rouble, but it hasn’t made it immune to global trends,” said Dmitry Dolgin, chief economist at ING in Moscow.
While central bank Governor Elvira Nabiullina pledged emergency support last week in the event of a market crisis, Friday’s meeting is expected to be a sedate affair. After last month’s unexpected quarter-point increase, all but two of the 35 economists surveyed by Bloomberg predict the benchmark will stay at 7.5 per cent.
Dangers abound
Plenty of risks still linger for the rouble. As the US midterms approach, lawmakers continue to mull sanctions that could ban investors from buying Russia’s new sovereign bonds and impose limits on its banks.
Benchmark Brent’s retreat from $80 has also put the currency of the world’s biggest energy exporter on track for its first weekly drop in three against a backdrop of global market ructions. The price of a barrel of Brent crude in rouble terms is the lowest since August.
Further down the line, the central bank has said it will make up for the foreign-currency purchases it skipped during the pause. That could mean additional rouble stress as the government returns to topping up reserves.
But for some economists, the decision on currency purchases says something more worrying about the central bank’s attitude to the rouble.
Red Lines?
Hitting the pause button implies the existence of red lines for the exchange rate beyond which the currency won’t be allowed to weaken, according to Vladimir Tikhomirov, chief economist at brokerage BCS Financial Group.
Back in 2014, when the first round of US and European Union sanctions helped send Russian markets into a tailspin, the central bank intervened heavily to support the rouble before ultimately letting the currency trade freely. Since then, it’s pledged to avoid interventions unless the rouble’s swings threaten financial stability.
Policymakers insist they’re allowing the market to determine the exchange rate and have explained their pause of foreign-currency purchases as an effort to steady the rouble. Nabiullina has said a decision to resume the programme will depend on volatility and not the rouble’s exchange rate.
Still, there may have been an element of smoke and mirrors to the last rate decision, according to Natalia Orlova, chief economist at Alfa-Bank.
“The decision to raise the key rate looks like a cover-up,” Orlova said. “It allowed them to distract attention from the announcement on halting the FX purchases and to create the impression that the central bank is regulating the economy with the help of interest rates.”
-With assistance from Zoya Shilova, Anna Andrianova and Torrey Clark.
To contact the reporter on this story: Evgenia Pismennaya in at epismennaya@bloomberg.net
To contact the editors responsible for this story: Gregory L. White at gwhite64@bloomberg.net,; Dana El Baltaji at delbaltaji@bloomberg.net, Alex Nicholson, Paul Abelsky
For more articles like this, please visit us at bloomberg.com
(c) 2018 Bloomberg L.P.