Rouble heads back towards record lows, threatening Russian living standards

March 1

The rouble weakened to 100 against the dollar in Moscow trade and fell even deeper on external markets on Tuesday, threatening the living standards of ordinary Russians with the country hit by harsh Western sanctions.

The currency had found some support after Russian authorities ordered exporting companies, among which are some of the world’s biggest energy producers from Gazprom to Rosneft, to sell 80% of their forex revenues on the market, as the central bank’s own ability to intervene on currency markets was curbed.

But the rouble’s brief gains still left it well shy of the 75 to the dollar mark and 87 to the euro it traded at before Russia recognised two breakaway regions in eastern Ukraine and sent its troops into the neighbouring country last week.

After a short-lived recovery in early trade, the currency had fallen 5.4% to 99.73 against the dollar by 1500 GMT in Moscow, and lost 3.5% to 109.68 versus the euro, slipping back towards Monday’s record low of 122.

On the EBS electronic trading platform, however, the rouble was pegged at 109.5 to the greenback, although still a distance from the all-time low of 120 hit on Monday.

The rouble will be steered by state measures to sell foreign currency on the domestic market and could even firm if people start selling dollars, fearing keeping savings in the US currency, said Dmitry Polevoy, head of investment at LockoInvest.

The rouble has tumbled since the start of Russia’s invasion of Ukraine, at one point losing a third of its value, prompting the central bank to more than double interest rates to 20% and adopt a range of other urgent measures.

“The substantial interest rate hike from the Bank of Russia failed to stabilise the rouble,” said Piotr Matys, senior FX analyst at In Touch Capital Markets.

“The currency’s moves are a clear indication that even such a drastic move is not sufficient to improve very negative sentiment towards the rouble, as it’s impossible for foreign investors to invest in Russian assets.”

Moscow calls its actions in Ukraine a “special operation” that it says is not designed to occupy territory but to destroy its southern neighbour’s military capabilities and capture what it regards as dangerous nationalists.

Stocks and bonds

Share trading on the Moscow Exchange was suspended for a second day after sharp sell-offs hammered the market since mid-February.

“The decision was very effective, as most blue chips are actively used in the REPO market, and a plunge may lead to margin calls,” said Ararat Mkrtchian, co-founder of Russian index company Beta FT.

Russia said on Tuesday it was placing temporary curbs on foreigners seeking to exit Russian assets and ordered the spending of up to $10 billion from its rainy-day fund on buying shares in Russian companies.

But depository receipts and exchange-traded funds listed in London and Frankfurt did open for trading with the London-listed iShares MSCI Russia ETF slumping as much as 50% before retracting some of its losses. The ETF is down around 80% since the start of the year.

Dominant state lender Sberbank’s depositary receipts in London tumbled 24% at some point to a fresh record low, taking year to date losses to 95%.

Trading volumes in Russian bonds evaporated on Monday, data from platform Marketaxess showed: Only 1.2 million euros ($1.34 million) in euro denominated bonds changed hands compared to 53 million euros on Friday while local currency bond trading shrank to 8.4 million roubles ($86,846) from nearly 27 billion roubles on Friday.

On a combined basis across roubles, euros and dollars, volumes plunged on Monday to a 10th of Friday’s trade, data from the trading platform showed.

Living standards damaged

The weak rouble is set to hit living standards in Russia and fan already high inflation, while Western sanctions are expected to create shortages of essential goods that people in Russia have become used to, such as cars.

The Institute of International Finance (IIF), a trade group representing large banks, also warned that Russia was extremely likely to default on its external debts and its economy would suffer a double-digit contraction this year.

The central bank and the finance ministry did not reply to a Reuters request for comment on the possibility of defaults.

Inflation will spike in the short term but over the longer term could slow as people in Russia switch to a money-saving mode, said LockoInvest’s Polevoy. Reuters