Russia Moves to Help Lift Stinking Ruble

By Nicole Hong in New York, Andrey Ostroukh in Moscow and Chiara Albanese in London 

        A spiraling currency crisis, fueled by the bite of Western sanctions and the plummeting price of oil, spurred Russia's central bank to raise interest rates late Monday, a drastic move aimed at shoring up the collapsing ruble.
        The surprise action came at the end of a turbulent day for global financial markets. Currencies and stock markets from several developing nations were buffeted by the deepening oil-price slump and worries about future interest-rate increases in the U.S.
        The epicenter of the troubles was Russia, where the ruble plunged to a record low in its biggest one-day decline since 1999.
        The ruble's fall, described by analysts as "staggering" and "extreme," prompted Russia's central bank to hike a key interest rate by 6.5 percentage points, to 17%, after New York's trading day had ended. One dollar now buys more than 65 rubles, compared with 33 rubles at the start of the year.
        Before Russia's late move, U.S. stocks posted their fifth loss in six sessions, with the Dow industrials dropping 99.99 points, or 0.6%, to 17180.84. The selling was more intense in other markets, with Europe's main index down 2.2%. Stock markets from Thailand to Mexico also dropped.
        Analysts chalked up that bout of selling to growing anxiety about the impact on fragile developing economies of falling oil prices and the Federal Reserve's looming policy shift. Many investors expect the Fed to signal at the end of its two-day meeting Wednesday that it is closer to raising interest rates than it has indicated in the past. That would deliver a hit to emerging markets that have benefited from years of easy-money policies by the U.S.
        Russia's central bank, which announced its decision after a late-night board meeting, said it increased rates because of devaluation and inflation threats. It also raised another key benchmark, known as the repurchase rate, to 18% from 11.5%. Themoves risk pushing Russia closer to recession and is liable to be a blow to Russian consumers, who will face much higher rates to borrow the currency.
        "Goodbye growth," said Luis Saenz, head of equities and derivatives-sales trading at Moscow-based BCS Financial Group.
        Daniel Tenengauzer, head of emerging-markets research at RBC Capital Markets, called the rate move a "game-changer."
        "Russia realizes their actions need to be more than cosmetic," he said. "They need to take meaningful and painful policy decisions, and this is definitely the right step." Still, he said he thought a sustained ruble rebound is unlikely unless Russia spends cash to support it.
        Other analysts said the move should help stave off a financial meltdown. "It is not about preventing recession, but a full-scale financial turmoil caused by the precipitous ruble fall. And from that perspective, it is the right decision, in our view," said Piotr Matys, strategist at Rabobank in London.
        The ruble has been depreciating steadily in the second half of this year, pressured by the weight of Western sanctions over Russian interference in Ukraine, falling oil prices and a sluggish economy. The Russian currency's decline has accelerated even after the country's central bank raised interest rates last week to 10.5% in an attempt to lure investors to keep their money in rubles.
        Russia's central bank stopped intervening to slow the ruble's fall in November after selling almost $75 billion from its foreign-currency reserves to little effect, although it has sold some $6 billion in ad hoc interventions this month. Russia still has the world's fourth-largest currency reserves, but they dropped to $416.2 billion in early December, their lowest since 2009.
        Russia is one of a handful of oil exporters struggling to contain the economic fallout from a 47% drop in the price of crude since June. Oil prices have been falling on signs the market is oversupplied, a decline that accelerated in November after the Organization of the Petroleum Exporting Countries said it would maintain its production quotas. On Monday, the benchmark U.S. oil price sank 3.3% on the New York Mercantile Exchange to $55.91 a barrel, the lowest since May 2009. Brent, the international benchmark, dropped 1.3% to $61.06 a barrel, also a more-than-five-year low.
        As investors dumped risky assets Monday, the selloff in emerging markets spread beyond major oil exporters into countries like India and Indonesia, which had been relatively resilient in recent weeks. In addition to the ruble, the Turkish lira dropped to a record low against the dollar, and the Indonesian rupiah fell to its weakest level since 1998. The Brazilian real and South African rand also fell to multiyear lows.
        Still, market participants stopped short of calling the selloff a full-blown panic. Even after Monday's declines, the Dow is still up 3.6% for the year, and many emerging-market stock markets have logged double-digit percentage gains in 2014. Some investors said, though, that the recent turmoil is a taste of what is to come as the Fed gets closer to raising rates.
        "There's just a lot going on in emerging markets, and investors are having some difficulty absorbing that information and figuring out what will happen next," said Lucas Turton, chief investment officer of Windham Capital Management LLC in Boston, which manages $1.8 billion. Mr. Turton said the firm cut back on its exposure to emerging-market stocks two months ago.
        Anxieties about the Fed statement revolve around speculation the central bank may be ready to drop an assurance that short-term interest rates will stay near zero for a "considerable time." A removal of that phrase could be a sign the Fed is poised to raise interest rates earlier than the market had anticipated. Higher rates are expected to accelerate flows of cash departing emerging markets, because they make yields in the developing world less attractive by comparison.
        The Fed is expected to raise rates next year alongside an improving U.S. economy, while central banks in Europe and Japan are pursuing strategies to stimulate growth and inflation. This divergence has caused the dollar to soar against currencies around the world in recent months. MSCI Inc.'s index of emerging-market currencies has dropped 4.1% this year as of Friday.
        "If the Fed indicates that interest rates are going to be raised earlier rather than later...that's likely to have a further negative impact on emerging markets," said Clem Miller, a portfolio manager at Wilmington Trust in Baltimore, which oversees $80 billion and has bearish bets on emerging-market stocks and bonds. Mr. Miller said he hasn't had such a small exposure to emerging markets since the early 2000s.
        Countries besides Russia have also tried to calm investors through intervention or higher interest rates. Mexico's central bank has been intervening in currency markets for the first time in 2 1/2 years to support the peso. Nigeria's central bank raised interest rates to a record 13% in late November to stabilize the naira. Both countries are major oil exporters. Central banks in Malaysia, Philippines and Singapore all sold dollars in November to combat the currency volatility, according to HSBC data.
        Some investors are using the selloff as a buying opportunity, which is common during bouts of turmoil in emerging markets. Bargain hunters also swooped in after a big emerging-market rout in January. Investors say they are especially keen on buying assets of oil-importing countries such as India and Turkey, which should benefit in the long run from lower oil prices.
        "There are winners and losers, but it might not seem that way when everything's selling off indiscriminately," said Steve Mason, a portfolio manager at Collins Capital Investments LLC in Miami, which boosted its exposure to emerging markets in October. "The short-term volatility is what creates the best SHYopportunities."
        Still, many investors are bracing for short-term turmoil in emerging markets as the dollar strengthens. Stephen Jen, founding partner of hedge fund SLJ Macro Partners, said emerging-market currencies could "melt down" as investors accelerate their selling.
        "Nothing the [emerging market] economies can do will stop these potential outflows, as long as the U.S. economy recovers," Mr. Jen said.
        Anjani Trivedi contributed to this article.
        Write to Nicole Hong at nicole.hong@wsj.com, Andrey Ostroukh at andrey.ostroukh@wsj.com and Chiara Albanese at chiara.albanese@wsj.com
        (END) Dow Jones Newswires

        December 15, 2014 19:35 ET (00:35 GMT)

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