The rouble enjoyed its largest daily rally since 1998, surging by as much as 11 per cent, after the Russian authorities unveiled a series of measures to halt its slide.
But confidence in the Russian currency remains fragile after “Black Tuesday”, when the Russian currency registered a 36 per cent intraday fall. The Russian central bank had previously sought to placate markets via a midnight 6.5 percentage point rise in interest rates to 17 per cent.
The measures announced on Wednesday included easing capital requirements on banks, coordinating some exporters’ currency sales and converting the finance ministry’s dollar surplus to roubles. But some analysts said the measures may not be sufficient to conclusively arrest the rouble’s slide. With oil prices still falling, what weapons does the central bank have left in its armoury if the rouble begins to slide again?
1. Large-scale FX intervention
Since it allowed the rouble to float freely in November, the central bank has stepped back from intervening heavily in the market. The Bank of Russia has dabbled in the past fortnight, selling just over $10bn since the start of December, but has not made an intervention meaningful enough to stop the rouble rout.
Analysts say the decision is probably motivated by the desire to preserve its $416bn in reserves as Russia faces the prospect of a contracting economy and ongoing international sanctions that throw western financing of Russian companies into doubt. But the critical situation created by the rouble plunge of the last two days may force a rethink. Mr Kouzmin estimates that if the central bank sold $20bn-$30bn a week, that could translate into a 10-15 per cent rouble appreciation.
There were signs on Wednesday morning that the Russian authorities might try this tactic: the ministry of finance announced it would sell its “remaining foreign currency” and buy roubles.
2. Limiting liquidity
Most economists agree that the central bank’s provision of healthy liquidity to the Russian banking sector has worsened the rouble’s tumble. The central bank handed 700bn roubles to Russian banks in a controversial liquidity auction that followed a 625bn rouble bond sale by Rosneft (the Rosneft bonds were allowed to be used as collateral for the central bank auction). As Daniel Hewitt at Barclays points out, central bank funding accounts for about 15 per cent of total liabilities in the Russian banking sector. “In our view, the generous provision of rouble liquidity has fuelled rouble sales against the dollar,” he says.
In response, the central bank could either put a complete freeze on rouble liquidity, only rolling over existing credits, or limit its provision of roubles to the banking sector. “Some form of quantitative tightening would help the Russian central bank gain control of the situation,” Mr Hewitt says.
3. Further rate rises
If at first you don’t succeed, try, try, try again . . .? A further rate rise should in theory support the rouble, but the central bank may be loath to do it if Monday night’s move is judged a failure. Already, Russian companies have reacted in horror to the prospect of sharply higher interest rates and a further increase would only pile more pain on struggling businesses. “The political room to raise rates further — while still there — has become more limited after yesterday’s move,” says Alexander Kliment, Russia strategist at Eurasia Group.
4. Capital controls
If the rouble rout continues, there is a very high risk of a more unorthodox turn in policy
- Alexander Kliment, Russia strategist at Eurasia Group
This is a last-ditch measure that would prove enormously unpopular with investors, companies and Russian citizens, but analysts say it is becoming a more realistic option as the rouble’s fall deepens. Some voices in the Kremlin, such as presidential adviser Sergei Glazyev, have raised the possibility of capital controls as a solution to the rouble collapse, while others, including central bank governor Elvira Nabiullina, have been vocal in their opposition.
Capital controls could come in different flavours: a softer version, which is the subject of a bill in the Russian parliament, would force exporters to convert a fixed proportion of their foreign currency earnings into roubles. Other possible measures, in increasing order of strength, could include raising reserve requirements on banks’ foreign currency positions; limiting withdrawals of foreign currency from banks; limiting purchases of foreign currency; and outright restrictions on capital leaving the country through the banking system.
Dmitry Medvedev, prime minister, told the heads of Russia’s top commodity exporters that the government would avoid “excessively tough regulation” of the currency market. But an official said that the government would play a greater role in coordinating foreign currency sales of state-owned exporters. Analysts also believe that if other measures to stabilise the rouble fail, capital controls are increasingly likely to be implemented. “If the rouble rout continues, there is a very high risk of a more unorthodox turn in policy,” says Mr Kliment.
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