Talk about a snowball effect. By themselves, individual pieces of news might have had little impact on the rouble. But they came in, one after another, with almost a perfect timing.First was the military offensive in Ukraine on June 3, followed by the central bank's comments on the target FX reserves on June 4. This was topped off by a drop in the oil price post the Opec meeting on June 5. It all might have caught some of the professional FX investors unawares.
A drop in the oil price after the Opec meeting was partly behind the rouble's fall. Photo: iStock
The official rouble exchange rate has moved sharply from 52.82 to US dollar as of June 1 (for next day settlement) to 56.24 on June 5. As recently as May 18, the Russian currency was trading at 49.53.
The rouble fall over the past week might have been triggered by events in Ukraine, where the worst violations of the ceasefire were reported on June 3. The initial market reaction, however, was relatively subdued - the rouble weakened marginally at MICEX on the day.
The FX rate (Tomorrow) and volumes traded at MICEX
The big move happened on June 4. At a banking conference, Russia's central bank governor Elvira Nabiullina made some quite reasonable comments about the state of the Russian international reserves. Yet, the market was jittery enough to take relatively straightforward remarks from the central bank's governor as a signal for action.
According to Nabiullina, the current reserves level is sufficient ($356 billion as of May 22), covering more than three months of exports. This, together with the short-term debt (around $40 billion needs to be paid until year-end), are equal to about 20% of the monetary base. The required level is around $188 billion and Russia has almost twice the amount.
Russia, however, is in a specific situation with restricted access to international markets and capital outflows. Therefore, the Russian reserves should be built up to “a very comfortable level” of $500 billion, enough to withstand long-term “stress” and cover significant capital outflows for the next two to three years. The governor did say that the increase should be gradual and not linear, and might take several years to reach. Its pace would depend on the current account situation.
It is hard to say if the market got more spooked by the comment about “situations of a long-term stress” (given what has been happening in Ukraine) or by the target reserve amount of $500 billion.
The current central bank policy of buying up to $200 million a day would mean that it could add just under $50 billion of reserves every 12 months, taking around three years of non-stop purchases for reserves to hit the target.
Russia's FX reserves and central bank FX purchases
As the rouble bolted, the Russian officials moved into damage limitation mode. The central bank's deputy governor Kseniya Yudaeva clarified the situation around the reserves build-up. The central bank might stop FX purchases, depending on the situation. Nabiullina herself pointed that the Russian economy should turn the corner in the second half of the year and that the central bank would improve its macro forecasts at its June rate-setting meeting.
Somewhat unprecedented, the economy minister Alexei Ulyukaev has gone as far as offering the market the exact number for the exchange rate: That is, the annual average of USD:RUB of 55 at $60 per barrel oil price. In other words, the selloff could have been overdone.
On a side note, the rouble volatility might have caught some speculative investors off guard. The data on the rouble futures positions at Chicago Mercantile Exchange, published by the US Commodity Futures Commission, show that the leveraged money increased their long rouble positions as of June 2.
Rouble futures positions by leveraged money