Fears Russian crisis is spreading across global markets

Investors are braced for more turmoil as the fallout spreads across global markets

A plunge in oil prices and an emergency interest rate rise to stabilise the rouble sent another shock through financial markets. Berenberg Bank Senior Economist Christian Schulz says the economic outlook for next year is terrible. Video: Reuters

 

Russia struggled for a second straight day to reverse a rout in the ruble with emergency measures, narrowing president Vladimir Putin’s options in confronting the country’s deepest financial crisis since 1998.

The rouble erased a rally of as much as 8.4 per cent, leaving it little changed, after the Finance Ministry announced that it bought the currency.

Just yesterday, it plunged, frustrating the central bank’s aim in increasing in interest rates to 17 per cent from 10.5 per cent. The rouble’s down 52 per cent this year.

“Certainly, there’s a panic in the markets,” said Vitaly Isakov, a portfolio manager at Otkritie Asset Management in Moscow. “The Finance Ministry is sending a signal that it sees the rouble as seriously undervalued and that at current levels it makes sense to sell dollars.”

Mr Putin is preparing for his annual news conference tomorrow in one of the most difficult moments of his 15-year rule. The economic stability that’s at the core of his support is under siege as confidence wanes in the currency and the country careeens toward recession. With oil prices collapsing and finger-pointing among officials breaking into the open, the US is preparing new sanctions over the Ukraine confrontation.

“This is a moment of truth” for Mr Putin, said Masha Lipman, an independent political analyst in Moscow. “It’s no longer possible to go on in the same fashion. The economy is tumbling. The time has come for a definitive choice, doing nothing won’t solve the problem.”

Rouble Meltdown

The rouble retreated 0.4 per cent to 67.8125 per dollar on Wednesday in Moscow. Ten-year government bond yields fell 148 basis points to 14.76 per cent. The RTS stock index rose after a nine-day retreat erased almost a third of its market value. Bets on future price swings for the ruble are the highest in the world after the currency’s three-month implied volatility jumped 17 percentage points this month to 45 per cent. The higher interest rate will crush lending to households and businesses and deepen Russia’s looming recession, according to Neil Shearing, chief emerging-markets economist at London- based Capital Economics.

Many Russians may not be aware of the scope of the crisis, even as they convert their rubles to hard currency and foreign companies such as McDonald’s raise prices.

State-run media outlets steered any criticism away from Mr Putin and portrayed the government as ready to take firm action.

Vladimir’s Regret

Vladimir Rudenkov from Voronezh, a city about 500km from Moscow, was one of those ignoring the government-media assurances. He transfered a portion of his savings into dollars yesterday and said he regretted that he didn’t exchange it all.

“The situation is catastrophic,” said Mr Rudenkov, a 35- year-old manager. “I don’t believe that the ruble collapse is happening only due to the falling oil prices. The government is the one to blame as it didn’t defend the national currency.”

The central bank, which already drained $10 billion of its foreign currency reserves this month on interventions, will probably need to spend another $70 billion to stem the slide, according to a survey of economists. In contrast, the ministry has $7 billion available to sell, according to its statement today, a sum that pales in comparison to the central bank’s $416 billion cash pile.

Russia has spent about $87 billion of these reserves this year in unsuccessful attempts to slow the ruble’s slide. ‘

Concerted Effort

’ Today’s purchases are “probably part of a concerted effort by the government to convince the public and market participants that the ruble is undervalued,” Ivan Tchakarov, Citigroup’s Moscow-based economist, said. “It will be even better if this is augmented by strong foreign-exchange interventions by the central bank.”

The ruble sank beyond 80 a dollar on Tuesday, a record low, as it became clear that the surprise 650 basis-point interest rate increase wouldn’t alter the ruble’s course. It pared declines following comments from economy minister Alexei Ulyukayev, who denied speculation the government would impose restrictions to stop Russians from converting cash into dollars.

Bloomberg