In the Emerging Market Storm, Look to Russia
(Bloomberg Opinion) -- The ruble has been swept up by the outgoing tide of the emerging market currency crisis. The Russian currency, down almost 17 percent against the dollar this year, sank to a two-and-a-half-year low on Thursday after Russian Prime Minister Dmitry Medvedev urged the central bank to cut interest rates to stimulate growth.
Traders are hyper-sensitive to government interference in the independence of central banks — as the recent example of Turkey illustrates. But further declines in the ruble are far from certain. Russia has stronger defenses than many of its emerging-market peers and, if needed, the central bank could still wield the bigger stick of a rate hike.
The prospect of further sanctions has loomed all year, but while several measures have been applied — and more may be coming — they have had only a limited impact on the economy. Unless the restrictions are extended to government debt, something the U.S. has so far specifically ruled out, Russia’s economy should still cope.
The central bank and Treasury have already taken small but significant steps to ease the pressure on the ruble. The former halted its routine daily purchases of dollars until next month, and the latter has cancelled the last two weekly bond auctions.
In a Bloomberg Television interview this week, Deputy Finance Minister Vladimir Kolychev said Russia could buy back its own bonds if needed. With government debt standing at only 13 percent of the country’s gross domestic product, one of the lowest ratios in the world, he has plenty of room to move.
Equally, with foreign exchange and gold reserves of $460 billion, there is a reasonable buffer to repay its international debt. The steady rise in the price of oil, Russia’s principal export, also provides a major bulwark.
The central bank’s position is admirably clear: It will move to raise rates if the ruble dramatically weakens further. A 10 percent fall in the ruble adds an extra percentage point to the inflation rate.
Central Bank of Russia Governor Elvira Nabiullina said earlier this week there will be a “real discussion” about hiking rates when policy makers meet on Sept. 14 — although she indicated that keeping them on hold would be the more likely outcome. Nevertheless, the stick is there.
Ten-year government bond yields have climbed from a low of 7 percent in late February to about 9.1 percent today. The real return, after deducting inflation at 3.1 percent, is one of the highest in the world at 6 percent. And that’s why the sanctions haven’t triggered an exodus of foreign investors. According to Kolychev the proportion of Russian bonds held by overseas owners has only dropped to 27 percent from 35 percent in March.
Russia has been buffeted by the storm in emerging markets that began in Argentina and Turkey. But it shouldn’t be viewed as just a part of that wider malaise, and don’t confuse the central bank’s reluctance to intervene so far for an inability to do so if needed.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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