Rate Cuts Meant to Slow Inflow
The Central Bank’s warning that it will use rate reductions to keep out speculative capital will probably fall victim to high oil prices, undermining the regulator’s efforts to stem ruble gains, economists said.
The bank on Thursday cut the refinancing rate half a point to a record low of 9.5 percent, partly aimed at “reducing the difference between short-term interest rates on the internal and external markets” to diminish “the attractiveness of short-term investments in Russian assets and stop the accumulation of risk on the stock and currency markets,” it said.
The regulator is struggling to stabilize the ruble and stem an appreciation that threatens to hurt exporters and stall economic recovery. The bank bought more than $11 billion of currency in October, First Deputy Chairman Alexei Ulyukayev said Oct. 23. Russia’s currency reserves, the world’s third-biggest stockpile, rose to $429.3 billion last week, the highest this year.
The bank’s warning “will keep investors wary, but in the case of Russia, if oil rests this side of $60 a barrel, which isn’t difficult to envisage, then obviously we will see continued capital inflow,” said Simon Quijano-Evans, head of emerging-markets strategy at Credit Agricole Cheuvreux in Vienna. “It’s the first warning that they don’t want to see massive inflows of short-term portfolio investments occurring.”
Russian stocks fell Friday, capping the worst week in more than three months, as commodity prices slumped and concerned deepened that the global economic recovery will slow.
The MICEX Index lost 4.2 percent to 1,237.18, with all but one stock out of 30 in the index falling. The gauge sank 9.4 percent this week, the biggest such decline since July. The dollar-denominated RTS Index shed 2.1 percent to 1348.54, bringing its weekly slide to 7.7 percent.
Urals crude has gained more than 80 percent this year and was trading at almost $77 per barrel Friday. Oil makes up 30 percent of gross domestic product.
“It seems that a new rise in oil prices, which would cause ruble firming both through the influx of ‘hot money’ and through the rise in the foreign trade surplus, would likely translate into deeper rate cuts,” said Tatyana Orlova, an economist with ING.
Rising crude prices coupled with “a renewed inclination of investors to take risks” required currency purchases to prevent “a sharp strengthening of the ruble,” the Central Bank said.
“Clearly the currency is more influenced by things like the oil price and global capital flows and global risk aversion,” said Vladimir Osakovsky, an economist at UniCredit in Moscow.
Russian equity funds posted net outflows of $43 million in the seven days to Oct. 28 after drawing a record $450 million a week earlier, the most since EPFR began tracking data in the first quarter of 2002.
“The recent bout of risk aversion, if prolonged, will also help calm the Russian Central Bank’s fears about the speculative inflows buildup,” Goldman Sachs economist Anna Zadornova said in an e-mailed note.
As a carry trade, in which investors borrow funds in a country with low interest rates and invest where rates are higher, the ruble is still attractive, said Peter Westin, chief strategist at Aton.
“Russia has one of the highest differences if you look at policy rates related, for example, to the U.S.,” Westin said. “Some Central Banks have started to introduce capital controls to stem inflows in the light of currency strengthening.”
The Central Bank and government seem “to be reluctant to impose capital controls again, but at the same time we should probably expect to see continued rate cuts in an effort to make inflows less attractive,” he said.
The ruble is the fifth-best performer against the euro and the dollar since the end of June of the 26 emerging market currencies tracked by Bloomberg. It has gained 6.7 percent against the dollar and 1.6 percent against the euro in the period.
The ruble added 0.5 percent to 29.06 per dollar in Moscow trading Friday, bringing last month’s increase to 3.5 percent. It added 0.5 percent to 42.99 per euro, the strongest level since Jan. 23.