Russia's central bank warns that capital outflows will reach $128bn this year and slashes its growth forecast to zero for 2015 as the ceasefire collapses in Ukraine
By Ambrose Evans-Pritchard, International Business Editor
8:45PM GMT 10 Nov 2014
Russia is battening down the hatches for a long battle with the West, expecting sanctions to last until at least 2017 and admitting that capital flight has been significantly higher than previously claimed.
The central bank slashed its growth forecast for next year to zero and warned of near-recession conditions until late in the decade. It said capital outflows would reach $128bn this year.
The new realism ends the pretence that Russia is strong enough to weather the end of the commodity supercycle without suffering serious damage, or that Western sanctions are little more than an irritation. President Vladimir Putin had previously said the effect would dissipate within months.
It comes as the ceasefire in eastern Ukraine disintegrates and international monitors (OSCE) report large incursions of heavy weapons, tanks and troops moving into the Donbass region, clearly from Russia. The White House called it a “blatant violation” of the Minsk accord agreed in September.
The rouble soared 3pc despite the bad news after Mr Putin vowed to “take action” to stabilise the currency and denied any plans to impose capital controls. The rouble closed at 45.74 against the dollar, still down 32pc this year and clearly still in danger.
The central bank ditched its strategy of defending the currency with half-hearted measures, instead threatening liquidity curbs and a lightning strike on speculators to prevent an exchange rate crash.
The bank said the rouble would be allowed to float freely. This ends Russia’s dual-currency basket and its attempts to stem the currency slide with fixed dollops of intervention, $350m for every five kopecks, which became a one-way bet for traders. The bank has burned through $40bn of foreign reserves since the start of October.
Crucially, the bank vowed to act with force against “financial stability threats”. It will tighten rouble liquidity used by local speculators for bets on the dollar, evoking punishing memories of the 2008 crisis, when overnight rates briefly punched to 3,000pc and scorched those caught on the wrong side of the trade. “Rouble liquidity is being used for games on the currency markets,” said Elvira Nabiulina, the bank’s governor.
“The rouble is rallying because of a short squeeze but it doesn’t change the big picture,” said Tim Ash, at Standard Bank. “They’ve got their heads in the sand if they think this is driven by speculators. Fundamentals and war risk are behind this.”
One hedge fund manager said traders were wary of a sudden counter-strike by the authorities. “Russia can still put up a good fight. We can argue over whether Russia has enough reserves in the end, but it certainly has enough to destroy your position as a trader on any given day if it wants to. We’re not talking about Nigeria or Ghana here,” he said.
US dollar versus the Russian rouble
Yet Russia remains in the eye of the storm as sanctions bite deeper and the collapse of oil prices change the economic landscape. Mr Ash said Russia was already suffering from the “Dutch Disease” before the invasion of Crimea, addicted to commodity exports that hollowed out the country’s industry and pushed the rouble too high. Non-oil exports have fallen from 21pc to 8pc of GDP since 2000.
Urals crude has fallen from $115 to $83 a barrel since June, prompting speculation by Mr Putin that the move is part of an orchestrated political campaign by Russia's enemies, clearly meaning the US and Saudi Arabia. Otkritie Capital, in Moscow, said the fall in crude is likely to pull down EU gas prices by 22pc next year due to linkage in Gazprom contracts. This will further erode Russia's foreign revenues.
Renaissance Capital said in a report that the marginal cost of new oil projects in Russia is around $90, warning that the country could lose 350,000 barrels a day of output next year if "economic logic" prevails.
The central bank has to pick between two poisons. The slide of the rouble is stoking inflation and asphyxiating companies with dollar debts, yet currency intervention entails monetary tightening and risks a banking crisis. The authorities learned the hard way in 2008 that selling reserves into a recession has ferocious side-effects. “The money base contracts and it crushes the economy,” said Lars Christensen, at Danske Bank. “We think Russia is already in recession, and contraction is going to get worse over coming quarters.”
The central bank expects oil to average $95 next year, an optimistic forecast as China steers its economy away from heavy industry, and renewed supply floods the market from Libya, Iraq and perhaps soon Iran. Deutsche Bank says the “fiscal break-even” price needed to balance the Russian budget and pay for the country’s growing military machine is around $100.
Mrs Nabiulina said foreign reserves will drop to $422bn by December, $35bn lower than previous estimates. This is still ample but not as large as it seems. Russian banks, companies and state entities have $731bn of external debt, mostly in dollars. They must roll over $162bn in the next few months, yet global capital markets remain almost entirely shut.
Oil giant Rosneft has requested $49bn in state aid, while VTB bank has reportedly sought $4.8bn. The bank’s president Andrei Kostin said it was thinking of switching VTB’s listing from London to “Chinese bourses” to make it easier to raise capital.
Lubomir Mitov, from the Institute for International Finance, said it would be “very dangerous” if reserves fell below $330bn. Foreigners have pulled back almost entirely and the financing gap has reached 3pc of GDP each year. A further fall in oil prices would push Russia into a current account deficit. “Russia is already in a perfect storm,” he said.
Circumstances are very different from 1998, when the crash in oil prices pushed Russia into default on its external debts. Yet the trauma of that episode is still fresh in people’s minds, and the illusion of high reserves can evaporate fast. “If they lose another 100bn in three months they’ve got a problem. People would start to panic, it could turn vicious very fast,” said Mr Ash.
The rouble soared 3pc despite the bad news after Mr Putin vowed to “take action” to stabilise the currency and denied any plans to impose capital controls. The rouble closed at 45.74 against the dollar, still down 32pc this year and clearly still in danger.
The central bank ditched its strategy of defending the currency with half-hearted measures, instead threatening liquidity curbs and a lightning strike on speculators to prevent an exchange rate crash.
The bank said the rouble would be allowed to float freely. This ends Russia’s dual-currency basket and its attempts to stem the currency slide with fixed dollops of intervention, $350m for every five kopecks, which became a one-way bet for traders. The bank has burned through $40bn of foreign reserves since the start of October.
Crucially, the bank vowed to act with force against “financial stability threats”. It will tighten rouble liquidity used by local speculators for bets on the dollar, evoking punishing memories of the 2008 crisis, when overnight rates briefly punched to 3,000pc and scorched those caught on the wrong side of the trade. “Rouble liquidity is being used for games on the currency markets,” said Elvira Nabiulina, the bank’s governor.
“The rouble is rallying because of a short squeeze but it doesn’t change the big picture,” said Tim Ash, at Standard Bank. “They’ve got their heads in the sand if they think this is driven by speculators. Fundamentals and war risk are behind this.”
One hedge fund manager said traders were wary of a sudden counter-strike by the authorities. “Russia can still put up a good fight. We can argue over whether Russia has enough reserves in the end, but it certainly has enough to destroy your position as a trader on any given day if it wants to. We’re not talking about Nigeria or Ghana here,” he said.
US dollar versus the Russian rouble
Yet Russia remains in the eye of the storm as sanctions bite deeper and the collapse of oil prices change the economic landscape. Mr Ash said Russia was already suffering from the “Dutch Disease” before the invasion of Crimea, addicted to commodity exports that hollowed out the country’s industry and pushed the rouble too high. Non-oil exports have fallen from 21pc to 8pc of GDP since 2000.
Urals crude has fallen from $115 to $83 a barrel since June, prompting speculation by Mr Putin that the move is part of an orchestrated political campaign by Russia's enemies, clearly meaning the US and Saudi Arabia. Otkritie Capital, in Moscow, said the fall in crude is likely to pull down EU gas prices by 22pc next year due to linkage in Gazprom contracts. This will further erode Russia's foreign revenues.
Renaissance Capital said in a report that the marginal cost of new oil projects in Russia is around $90, warning that the country could lose 350,000 barrels a day of output next year if "economic logic" prevails.
The central bank has to pick between two poisons. The slide of the rouble is stoking inflation and asphyxiating companies with dollar debts, yet currency intervention entails monetary tightening and risks a banking crisis. The authorities learned the hard way in 2008 that selling reserves into a recession has ferocious side-effects. “The money base contracts and it crushes the economy,” said Lars Christensen, at Danske Bank. “We think Russia is already in recession, and contraction is going to get worse over coming quarters.”
The central bank expects oil to average $95 next year, an optimistic forecast as China steers its economy away from heavy industry, and renewed supply floods the market from Libya, Iraq and perhaps soon Iran. Deutsche Bank says the “fiscal break-even” price needed to balance the Russian budget and pay for the country’s growing military machine is around $100.
Mrs Nabiulina said foreign reserves will drop to $422bn by December, $35bn lower than previous estimates. This is still ample but not as large as it seems. Russian banks, companies and state entities have $731bn of external debt, mostly in dollars. They must roll over $162bn in the next few months, yet global capital markets remain almost entirely shut.
Oil giant Rosneft has requested $49bn in state aid, while VTB bank has reportedly sought $4.8bn. The bank’s president Andrei Kostin said it was thinking of switching VTB’s listing from London to “Chinese bourses” to make it easier to raise capital.
Lubomir Mitov, from the Institute for International Finance, said it would be “very dangerous” if reserves fell below $330bn. Foreigners have pulled back almost entirely and the financing gap has reached 3pc of GDP each year. A further fall in oil prices would push Russia into a current account deficit. “Russia is already in a perfect storm,” he said.
Circumstances are very different from 1998, when the crash in oil prices pushed Russia into default on its external debts. Yet the trauma of that episode is still fresh in people’s minds, and the illusion of high reserves can evaporate fast. “If they lose another 100bn in three months they’ve got a problem. People would start to panic, it could turn vicious very fast,” said Mr Ash.
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