Viewpoint: Making Sense of Russia’s Ruble Trouble
December 17, 2014
The Ruble crisis: what happened? The Russian Ruble crisis reached a peak this week, as the Central Bank of Russia (CBR) hiked rates
650 basis points to 17%. This move revealed a more proactive desire by the CBR to stave off dollar outflows at a time when
petrodollar revenues are shrinking. Fearing that the interest rate hike won’t be enough to shore up dollar liquidity, markets are now
assigning a higher probability that policymakers will eventually resort to some form of capital controls. USDRUB sold off intraday to as
high as 79, but has retraced lower to about 61 currently. To be sure, falling oil prices and escalating tensions in the Ukraine have been
the key headwinds in recent months (chart below). But this week’s extreme currency volatility goes well beyond the movement in oil
prices. It is more reflective of a confidence crisis: holders of Ruble assets, including deposits, are worried about Ruble convertibility to
hard currency.
Crude oil and Ruble exchange rate: collapsing together
Index (Jan. 2014 = 100)
110
Brent Crude
100
90
RUB exchange rate
80
70
60
50
Jan-14
Apr-14
Jul-14
Oct-14
Source: EIA, CBR. J.P. Morgan PB Economics. December 2014.
Russia headed towards outright recession. Geopolitics, lower energy prices, and economic sanctions are all weighing on the Russian
economy, which has ground to a halt this year (left chart). Oil and gas proceeds comprise half of Russia’s federal government
revenues and roughly 70% of exports. Importantly, Russia requires about $80 oil for most new oil projects to be profitable, which is
likely to present a drag on investment going forward. This comes at a time when sanctions have forced Russia to search for
agricultural and other goods imports outside the West, typically at higher dollar costs. Granted, export revenues in Ruble terms are
unlikely to change much, as the Ruble depreciation offsets the slump in oil prices. But animal spirits are squarely focused on the
decline in petrodollar revenues and a crunch in credit. For this reason, outright recession for 2015 is highly likely. Moreover, inflation
has accelerated to nearly 10% and will stay high next year, as Ruble depreciation drives up the cost of imported goods (right chart).
Whether this “stagflationary” environment persists beyond 2015 depends on the evolution of oil prices and the policy response.
Past performance is not indicative of future results. It is not possible to invest directly in an index.
2 | Wednesday, December 17, 2014
Macro Skinny
Russian growth has ground to a halt…
...and inflation is accelerating
Consumer prices, YoY % change
Real GDP growth, YoY % change
16%
10%
12%
5%
8%
0%
4%
-5%
-10%
2003
2005
2007
2009
2011
2013
Source: State Committee of the Russian Federation. 2014:Q3.
Target
0%
2003
2005
2007
2009
2011
2013
Source: Federal State Statistics Service. December 2014 is estimated.
For now, Russia appears to have sufficient FX reserves. Having learnt from the crises of the late 1990s and early 2000s, many EM
central banks, including Russia’s, began amassing ‘rainy-day’ FX reserves. The rainy days are here. Earlier this year, CBR sold almost 18%
of its reserves to stabilize the Ruble. The CBR entered “reserve conservation mode” in early November. By allowing the Ruble to float,
the CBR was able to retain the remaining reserves so that the government, corporates and banks can repay their foreign currency debt
obligations. The critical question at this juncture is whether there are enough reserves for this purpose. On the dollar liability side, debt
amounts to $550bn, of which $130bn is due in the next 12 months (right chart). On the dollar asset side, total FX reserves are
estimated at over $400bn, but conservatively, we assume that only $250bn is parked in liquid G7 government bonds and gold
(assuming the rest is in the form of hard-to-access sovereign wealth fund assets, left table). Nonetheless, with roughly $250bn in liquid
FX reserves, there seems to be enough liquidity to meet dollar needs for the next year or longer, certainly for non-bank debt securities
(which are clearly more difficult to negotiate than bank loans). What’s more, Russia is running a current account surplus, which means it
is still attracting dollars each year. This surplus is unlikely to disappear all together. That’s because reduced oil revenues are likely to be
offset by reduced import demand (as is normally the case in recessions). Our assessment is that dollar liquidity seems sufficient in the
near-term and in aggregate. We have less conviction beyond 2015, and, at the company-level, we may see firms seeking to restructure
their debts, particularly if CBR does not consider them too-important-to-fail.
Russia’s liquid FX reserves & gold…
…seem sufficient to cover near-term external debt
External debt, billions USD
Billions, USD
Russia's total FX reserves
419
Gold
45
IMF reserves and SDRs
12
Sovereign w ealth funds
169
Liquid FX reserves
192
120
100
Ban k lo ans
No n -bank corporate d ebt
80
60
40
20
0
2015
Source: CBR, FinMin, J.P. Morgan PB Economics. Nov 2014.
2016
2017
2018
2019
2020
Source: J.P. Morgan Securities.
A full blown crisis is unlikely, but volatility will likely persist. Given how Russian exports are heavily concentrated in energy, the value of
the Ruble should reflect the present discounted value of future oil revenues. Oil prices have fallen a lot, which is why the Ruble
“deserves” a more punitive equilibrium exchange rate of around 50-55 against the US dollar. The FX market, however, is assigning a
greater discount on the currency at the moment. This seems rational, as long as corporates continue to scramble for US dollars to
meet upcoming debt redemptions. The stress in the Ruble clearly has an impact on the Russian external debt market. Intuitively, a
sharp reduction in the currency “shrinks” the size of the Russian economy in dollar terms, which in turn, makes Russia’s hard currency
debt more burdensome. That is why Russian external debt sold off so aggressively in recent days. Foreign banks are holders of loans to
Russian companies, but the small share of lending makes it less of a concern (left chart). Over the past year, the credit spread curve has
Past performance is not indicative of future results. It is not possible to invest directly in an index.
Macro Skinny
December 17, 2014 | 3
shifted materially higher, suggesting that the market is now pricing in significantly higher near-term probability of default than in the past
(right chart). But as argued above, there seems to be sufficient liquid reserves to meet Russia’s near-term obligations. For this reason,
our Fixed Income Strategy team believes there is little value in rushing out of the debt market amid these highly illiquid market
conditions.
Foreign bank exposure to Russia is limited
Markets are pricing a higher likelihood of default
Foreign claims on ultimate risk basis, percent of total foreign claims
Spread (bps)
600
Belgium
UK
Switzerland
Japan
Germany
US
Europe
Sweden
Neth
India
France
Korea
Italy
Turkey
Austria
CDS Curve,
Dec. 2014
500
400
300
200
CDS Curve,
June 2014
100
0
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6M
1Y
2Y
3Y
4Y
5Y
7Y
10Y
Source: Bloomberg, J.P. Morgan. December 16, 2014
Source: BIS consolidated statistics, Q2 2014.
The scope for escalating contagion effects is limited. There is no doubt that foreign exchange and high yield markets have been
influenced by the Russian crisis (two charts below), but one has to bare in mind other weighing forces, which may have given the
impression that contagion effects are taking hold. Indeed, the downward pressure in global commodity prices has independently
weighed on other commodity-linked currencies and credits. Similarly, tensions around the Greek elections, have an effect on European
credit and equity in recent days. Commodity-linked economies may come under more pressure in the coming months. But don’t
blame it on Russia, as there is a bigger story encapsulating all commodity-linked economies; China’s growth is still trending down at a
time when more mining capacity comes on line. Outside these economies, contagion effects from the Russian crisis should be limited
to a “sympathy selloff.”
Ruble weakness hasn’t wiped out broad EM FX…
Index (Jan. 2014 = 100)
…or EM credit spreads
Spread ,BPS
100
Emerging Markets
1,000
Russia
800
80
Russia
600
60
400
Emerging markets
40
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Source: Bloomberg, J.P. Morgan. December 16, 2014
Nov-14
200
Dec-13
Mar-14
Jun-14
Source: Bloomberg, J.P. Morgan. December 16, 2014
Past performance is not indicative of future results. It is not possible to invest directly in an index.
Sep-14
Macro Skinny
December 17, 2014 | 4
More broadly, the fundamental backdrop for non-commodity economies is a lot more robust. First, since the shock is emanating from
lower commodity prices, what is ‘pain’ for Russia and other commodity economies, is ‘gain’ for the rest of the world. This is very
different from the ‘all-lose’ Asian crisis in the late 1990s. Second, global monetary policy is extremely accommodative, in spite of the
likely start to the Fed’s tightening cycle next year. The real ‘punch bowl’ is long-term interest rates, and they aren’t about to rise fast
anytime soon. Again, this is strikingly different from the late 1990s, when the global interest rate cycle was at its peak. Third, economic
imbalances are considerably low outside China and commodity-linked economies. In particular, non-commodity EMs are characterized
by flexible exchange rates, and minor current account imbalances.
Michael Vaknin
Chief Economist, J.P. Morgan Private Bank
Paul Eitelman
Senior Economist, J.P. Morgan Private Bank
Jeff Greenberg
Senior Economist, J.P. Morgan Private Bank
Michael Rednor
Economics Analyst, J.P. Morgan Private Bank
Abbreviations:
EM – Emerging Markets
FX – Foreign Exchange
GDP – Gross Domestic Product
EIA – Energy Information Administration
IMF – International Monetary Fund
CBR – Central Bank of Russia
RUB – Ruble
FinMin – Ministry of Finance
IMF – International Monetary Fund
BIS – Bank for International Settlements
HY – High Yield
CDS – Credit Default Swap
JPMPBE – J.P. Morgan PB Economics
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