Swedish managers comment on Russia developments

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Russia’s capital markets have experienced significant downside volatility in the wake of legislative action in the US over the weekend and the Russian central bank decision to sharply increase interest rates to defend the currency.

Commenting on the market, CEE specialist investor East Capital noted that the central bank made its announcement “just before 1 am”, as a result of which its key interest rate has shot up to 17% from 10.5%.

“Russia had to take drastic action to defend its currency. The move was the largest single increase since 1998. The news prompted an immediate gain in the ruble, with one-month ruble forwards up 1.6 % in Asian trading.”

“On Monday the USD-denominated RTS index dropped 10.1% while Micex, which is denominated in rubles, fell 2.4%. The RUB weakened 9.7% against the USD. The primary reason behind the currency and subsequent equity correction is that the US congress passed the so called “Ukraine Freedom Support Act” over the weekend. The bill, if enacted, does not impose any sanctions in itself but would give the president authority to impose new sanctions against Russia.”

“It is not certain that the bill will be signed into law as president Obama previously urged Congress not to pursue new economic sanctions on Russia, arguing it would be counterproductive and a strategic mistake. But the fact that Congress approved the bill nevertheless increases the threat of further sanctions at a time when market participants are eager to reduce their exposure to Russia.”

Commenting earlier via its Facebook account, boutique manager Tundra Fonder noted that the latest fall in the rouble means it is down some 50% against the dollar through this year so far.

The volatile trading, which saw the local market shed about 10% on 15 December, also came with reports that the central bank had disconnected some brokers from trading the RTS future.

Tundra said that the market’s fall was surprising given that the oil price was “more or less unchanged for the day”. Instead, it suggests that local investors had engaged in broader selling of the local currency. Concerns over capital flight continue, the manager noted.

“The capital outflow from Russia is totalling $125bn for the year according to the Minister of Economy. This is the worst year since 2008. The outflow is a combination of capital flight and debt repayments in foreign currencies by Russian banks and companies. After the western sanctions on Russia it’s difficult for some Russian companies and banks to roll over debt as it expires.”

“The selling was by no means limited to the equity market. One broker reporedt corporate bonds were sell only all day. Bids were taken lower and lower during the day. The three-month MosPrime interbank rate climbed 217 basis points this month to 14.84%. The Bank of Russia cancelled a ruble 700bn ($11.6bn) auction of three-year funding after receiving no bids.”

“In addition we have the situation in Ukraine. The Ukrainian freedom bill was passed by Congress and the House of Representatives in the US last Friday. This may push Russia to further lows if signed by president Obama as soon as this week. The response from Russia is key here and naturally the market is nervous about the outcome.”

 

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