The ruble plunged to 80 a dollar for the first time as investors speculated Russia will announce capital controls after the largest interest-rate increase in 16 years failed to revive confidence in the currency.
The ruble sank as much as 19 percent to 80.10, before trading at 78 at 3:14 p.m. in Moscow. That was the biggest drop since 1998, the year Russia defaulted on its local debt. The currency erased a gain of 11 percent as investors shrugged off a surprise Bank of Russia decision to take its key interest rate to 17 percent from 10.5 percent. Ten-year government-bond yields jumped 317 basis points to a record 16.4 percent.
Russian central bank Governor Elvira Nabiullina may resort to capital controls as she runs out of options to revive a currency wrecked by the oil-price slump and international sanctions, money managers from Schroder Investment Management Ltd. to Skandinaviska Enskilda Banken AB said. The ruble has plummeted 58 percent this year even after an 11.5 percentage-point increase in rates and interventions exceeding $80 billion.
“I am speechless,” Jean-David Haddad, an emerging-market strategist at OTCex Group in Paris, said in a message. “What a failure for the central bank. Russia would need to announce capital controls today. That is the last solution.”
The Russian government will hold a meeting on financial issues today, Prime Minister Dmitry Medvedev said. The cost of insuring against losses on government debt jumped to 601 basis points, the highest since March 2009, while the dollar-denominated RTS Index of equities plummeted to 5 1/2-year low.
The costs of the depreciation in ruble, which has lost 54 percent of its value this year, are steep as inflation hovers at a more than three-year high and currency interventions drain the nation’s reserves. Russia’s cash pile has fallen to a five-year low of $416 billion as the central bank spent more than $80 billion this year trying to slow the ruble’s biggest annual retreat since 1998.
While the strain on reserves led the central bank to push forward plans last month for a freely floating ruble, policy makers spent more than $6 billion on interventions since OPEC unleashed a selloff in oil after its Nov. 27 decision to keep output unchanged.
“If such a rate hike, such a shot of medicine doesn’t help the ruble, then interventions won’t help either,” Artem Roschin, a foreign-exchange dealer at Aljba Alliance in Moscow, said by phone. “There’s no point in spending reserves.”
Brent crude, the grade of oil traders look at for pricing Russia’s main export blend, tumbled 3.6 percent to $58.86 a barrel in London today. Since the country derives about half of budget revenue from oil and gas industries, the weaker ruble is offsetting some of Brent’s 47 percent slide this year.
The boost in Russian borrowing costs, which happened in a surprise announcement just before 1 a.m. in Moscow, was the biggest since rates soared past 100 percent in 1998. The move takes the total increase in borrowing costs to 11.5 percentage points since President Vladimir Putin’s incursion into Ukraine’s Crimea peninsula in March.
The annexation of the Black Sea peninsula that month led the U.S. and European Union to impose sanctions on Russian companies and individuals, creating a domestic dollar shortage that’s become exacerbated as companies face debt maturities.
The central bank is also juggling prospects for the worst recession since 2009 while trying to prevent inflation from soaring further past 9 percent.
Russia’s gross domestic product may shrink 4.5 percent to 4.7 percent next year if oil averages $60 a barrel under a “stress scenario,” the central bank said yesterday. Net capital outflow may reach $134 billion this year, more than double last year’s total.
“Our traders are informing me that we see no bids to buy rubles,” Per Hammarlund, chief emerging-markets strategist at Skandinaviska Enskilda Banken AB, said by e-mail from Stockholm. “I thought 17 percent would give them at least a month of breathing space. We next have to look at the experience in 1998-1999. We are also one big step closer to capital controls.”