Exchange Control in Russia Soon as Rouble Falls 17% to 80 per dollar

Debt Default could be Next?

The rouble plummeted into a freefall, losing as much as 19 percent as panic swept across Russian financial markets after a surprise interest-rate increase to 17 percent failed to stem the run on the currency.

The rouble sank beyond 80 per dollar, a record low, before rebounding speculation that the government would turn to foreign-exchange restrictions to stop Russians from converting money into dollars. Bonds and stocks also tumbled with record low.

The government could make it harder for depositors to swap cash into hard currency or require exporters to bring some earnings into the country.

While there were no initial signs of Russians lining up in downtown Moscow to pull their rouble deposits and buy dollars, Khanty-Mansiysk Otkritie Bank, the retail arm of the country’s second-largest private lender, said demand for foreign currencies was three to four times the daily average.

Even after rebounding late in Moscow, the rouble was still down 14 percent this week and 27 percent this month. It earlier fell the most in a day since the country defaulted and devalued the currency in 1998. Ten-year rouble bond yields jumped 3.05 percentage points to 16.28 percent while the annual cost of insuring against a debt default climbed to 5.55 percent in the credit-default swaps market, the highest since 2009.

The swings are proving too much for some brokers. FXCM Inc., the third-largest currency broker for retail clients, will stop offering the rouble versus the dollar and begin closing its customers’ trades. Alpari UK Ltd. stopped clients from taking new positions, while Saxo Bank A/S and Gain Capital Holdings Inc.’s Forex.com said they planned to demand higher deposits from clients to deal in the currency.

Policy makers are losing control of the situation as the six-month, 49 percent tumble in oil robs President Vladimir Putin of the hard currency to sustain an economy faltering under US and EU sanctions on Ukraine.

Currencies crash, Contagion effect?

The top emerging-market currencies fell to the lowest since 2003 while equity benchmarks in Dubai and Saudi Arabia lost more than 7 percent each and Indonesian policy makers propped up the rupiah after it fell to a 16-year low. Bank of England Governor Mark Carney said that he sees the potential for contagion effect from emerging markets into developed ones that could have “some impact” on financial stability and growth.

In addition to denying that officials were considering currency restrictions, Ulyukayev, the economy minister, told reporters after the meeting that “of course” rates should have been raised earlier than they were. No policy changes were announced. The currency’s plunge was exacerbated by concern that policy makers were pumping more rubbles into the economy to prop up state companies like oil giant OAO Rosneft, measures that effectively give investors additional money to purchase dollars.

OAO Rosneft’s Chief Executive Officer Igor Sechin said suggestions the company’s bond sale contributed to the rouble’s decline were a “provocation” and reiterated that it has no plans to convert the 625 billion roubles it borrowed last week into dollars. Rosneft sold 57 percent of the $118 billion of foreign currency it earned in the first nine months of the year, he said.

But central bankers are pushing roubles into the financial system to prevent credit from seizing up and deepening the slowdown in an economy that’s already sinking into recession nine months after Putin invaded Ukraine’s Crimea peninsula. The central bank allotted 3.1 trillion roubles in seven-day loans, known as repos, at an auction on 16 December, the second-biggest such operation since May.

‘Too Late’

The rouble has kept plunging even after the central bank raised rates 11.5 percentage points this year, including today’s surprise move, and spent more than $80 billion in the foreign-exchange market, draining reserves to a five-year low. Russia is sinking into stagflation as a recession looms at the same time that inflation soars to a three-year high.

The economy may shrink as much as 4.7 percent next year if oil, Russia’s biggest export, averages $60 a barrel under a “stress scenario,” the central bank said on 15 December. Net capital outflows may reach $134 billion this year, more than double last year’s total.