From Ruble to Rubble in a Heartbeat

The Russian ruble has been in panicked free-fall, not unlike the oil price. Last night the Russian central bank reacted by hiking its interest rates, not in baby steps, but rather in giant strides. This was incidentally the second rate hike in just four days and the fifth this year. From the press release:


“From 16 December 2014 the Bank of Russia Board of Directors decided to raise the Bank of Russia key rate to 17.00 percent per annum. This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks.

From 16 December 2014 in order to strengthen the efficiency of monetary policy loans secured by non-marketable assets or guarantees for 2 to 549 days will be provided at a floating interest rate, set at the Bank of Russia key rate level, increased by 1.75 percentage points (up to the present these loans for 2 to 90 days were provided at fixed rate).

Moreover, for further expanse of credit institution ability to manage their foreign exchange liquidity it was decided to increase maximum allotment amount for28-day FX REPO auctions from 1.5 to 5.0 billion USD and to conduct 12-month FX REPO auctions on weekly basis.”


To help readers to appreciate what a giant move in rates this was, here is a table showing the rates after the last rate hike on December 12 compared with those instituted yesterday:


Bank of RussiaOvernight liquidity provision goes from 11.5% to 18%, 3 month rates go from 10.75% to 17.25% – click to enlarge.


The reason for this was the aforementioned panicked sell-off in the ruble, which looks like this over the past nine months:


the rubbleUSD-RUB: The ruble turns to rubble – click to enlarge.


Does this move make much sense? We actually don’t think so – oil is certainly very important for Russia’s economy, but a recent study of the Russian economy (pdf) concludes that the energy industry actually contributes only 16% to total economic output in Russia. The reason why people in the West are somewhat less aware of what Russia produces is that it is exporting a lot to former Eastern Bloc satellites and former Soviet Republics. Some Russian products are also well-known and well-liked in the West though, such as e.g. Kaspersky anti-virus software (which works like a charm).

Moreover, Russia’s money supply growth has been slowing quite sharply in recent years (admittedly we are not up-to-date on what has occurred in this respect in the most recent months).

Here are two charts by Frank Shostak depicting Russia’s true money supply growth and the growth rate of the Russian central bank’s balance sheet – these charts are a bit dated by now, the end point is in mid 2014 – still, one can clearly see that the trend has been toward a sharp slowdown in monetary inflation.


Russia money TMS y-yRussia’s true money supply growth (money AMS y/y) as of mid 2014, via Frank Shostak – click to enlarge.


Russia central bank balance sheet y-y

Russia’s central bank balance sheet growth, y/y – click to enlarge.


Rosneft and Foreign Debt Woes

However, a friend pinged us with the following background information:


“On Friday Russian Oil giant Rosneft issued 625 Billion Rubles in new bonds that apparently were immediately bought by the Russian CB. It’s known that Rosneft is due some big payment in USD to cover debts it incurred in buying TNK-BP. In 2013 it borrowed $55 Bln, some of it apparently short term. So on Monday the market thought that Rosneft had a big wad of Rubles ready to buy $10 Bln worth of the USD, so everyone tried to front-run it, so the Ruble collapsed.”


We can conclude from this that the ruble is not exactly the world’s most liquid currency. The South African Rand incidentally also has a tendency to occasionally make such large moves. In the meantime, Bloomberg has also picked up the Rosneft story, and apparently Russian banks provided Rosneft with a large bridge loan, while Russia’s central bank quickly made Rosneft bonds eligible as collateral in refinancing operations, so that the banks could immediately get liquid again. Similar strategies were employed by Russia in the 2008-2009 crisis, when the oil price collapsed from the nearly $150 to a mere $30. Russia’s “rainy day fund” did not participate in the Rosneft bond issue, but did buy some Gazprom preferred shares a while back.


“Russia’s most-indebted company slapped by sanctions, OAO Rosneft, raised $10.8 billion on the local market this week in an operation financed by the central bank.

The deal comes as Russian corporations struggle with foreign-currency debt after U.S. and European Union sanctions curbed access to international capital markets and the country’s economy heads for recession next year. Rosneft, which faces a $7 billion loan redemption on Dec. 21, obtained the central bank-backed deal after delays by the government over its request to tap the country’s National Wellbeing Fund.

Rosneft sold 625 billion rubles ($10.8 billion) of six- and 10-year notes yesterday at yields below those on equivalent Russian government securities. The Bank of Russia cleared the securities to serve as collateral in an unprecedented 700 billion ruble liquidity auction planned for Dec. 15, meaning bondholders will have access to central bank cash at a time money-market rates are at a five-year high.

“Cut off from international refinancing, the company has to cover its refinancing gap by indirectly borrowing from the central bank,” Sberbank CIB analyst Alexey Bulgakov said by e-mail from Moscow today.


Rosneft said it placed 225 billion rubles of bonds with an initial coupon of 11.9 percent and 400 billion rubles of debt with a floating coupon. The Russian government’s 10-year local-currency note yields 12.99 percent, the most in five years. The rate on Rosneft’s dollar securities due March 2022 increased 23 basis points 9.83 percent as of 6:05 p.m. in Moscow. The company’s shares gained 1.3 percent to 210.75 rubles, paring their drop in the week to 5 percent.

This year’s five interest-rate increases by Bank of Russia Governor Elvira Nabiullina, the ruble’s 43 percent drop against the dollar and no access to foreign capital limit refinancing options for Russia’s sanctioned companies.

Rosneft, the world’s biggest publicly traded crude producer by volume, has about $10.2 billion of debt coming due in the fourth quarter, including a $6.88 billion loan from foreign banks on Dec. 21, as well as $19.5 billion in 2015. The company has about $20 billion in cash and equivalents, according to its third-quarter earnings report.


(emphasis added)

Naturally Rosneft’s stock price chart doesn’t look all that great either. However, in recent weeks there has been quite heavy panic selling in the stock, the market cap of which is now at less than what it paid for its stake in TNK-BP. As an aside, Russian companies are of course eager to pay their foreign-currency debt in a timely fashion, even if sanctions are currently limiting their access to new financing. They undoubtedly want to stay in the good graces of foreign lenders. However, we would also point out that an old saying applies here, something about who’s in trouble depending on whether one owes a few thousand or a few billions to one’s bank. Note by the way that the Rosneft share price shown below is not in ruble terms, but in euro terms. In ruble terms, most Russian stocks obviously look a lot better.


rosneftOnce support broke, Rosneft’s share price was mercilessly whacked – click to enlarge.


Given that Rosneft will want to satisfy its foreign bondholders, it is not too far-fetched to make the connection between its need to buy dollars and the attempt of market participants to front-run it by selling the ruble.


The Rate Hikes in Perspective

It is a good bet that the ruble is by now egregiously undervalued, even in light of the oil price decline and economic sanctions. Russia’s central bank is actually known for being quite conservative. Instituting massive rate hikes in such a situation is certainly a better approach than wasting foreign reserves in market interventions. Hong Kong once hiked rates into triple digit territory for a little while to defend its peg against speculative selling. Obviously, the main objective is simply to increase the cost of carry for traders shorting the currency and at the same time make the currency more attractive to those looking for high yields. It seems rather unlikely that Russia’s economy actually needs base rates between 17 to 18% right now, but as a preemptive measure to cool speculation against the currency, such rate hikes probably make sense. We suspect there will be more central bank moves to come before the situation calms down again – especially as the rate hikes have not had much of an effect yet (that is actually an understatement).



Situations like this one very often turn out to have been great opportunities in hindsight. Readers may recall the Russian crisis of 1998 – anyone buying shares and bonds in Russia when the news and the market action were at their very worst made out like a bandit in the end (those brave enough to wade in were eventually rewarded with absolutely stunning gains in this particular case). Of course in a panic sell-off, (or its corollary, a blow-off move), being early by just a few days can be pretty painful in the short run. Nevertheless, this is one of those times when it seems to us that opportunity beckons for those able to stand the risk. There is probably no hurry, we will certainly keep a very close eye on developments.


Charts and tables by: BarCharts, Frank Shostak,, Central Bank of Russia




Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


2 Responses to “The Russian Rubble”

  • jimmyjames:

    Elvira Nabiullina, is also damn hot .. especially compared to that gargoyle that the fed has on display ..

  • wrldtrst:

    Raising interest rates weakens/not strengthens a forward currency. If the difference between a countries rates are 15%, then over the same time frame, the countries currencies must be 15% different in price. Therefore raising rates weakens the currency…therefore inflationary.
    No one ever gets this right for some reason. Well, guys trading calendars on the CME do, but other than them…

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Stock Market Manias of the Past vs the Echo Bubble
      The Big Picture The diverging performance of major US stock market indexes which has been in place since the late January peak in DJIA and SPX has become even more extreme in recent months. In terms of duration and extent it is one of the most pronounced such divergences in history. It also happens to be accompanied by weakening market internals, some of the most extreme sentiment and positioning readings ever seen and an ever more hostile monetary backdrop.   Who's who in the zoo in...
  • How the Global Trade Contraction Begins
    Historical Evidence The world grows increasingly at odds with itself, with each passing day.  Divided special elections.  Speech censorship by Silicon Valley social media companies.  Increased shrieking from Anderson Cooper.  You name it, a great pileup is upon us.   It was probably Putin's fault (just a wild guess) [PT]   From our perch overlooking San Pedro Bay, the main port of entry for Chinese made goods into the USA, facets of the mounting economic catastrophe come...
  • TARGET-2 Revisited
      Capital Flight vs. The Effect of QE Mish recently discussed the ever increasing imbalances of the euro zone's TARGET-2 payment system again in response to a few articles which played down  their significance. He followed this up with a nice plug for us by posting a comment we made on the subject. Here is a chart of the most recent data on TARGET-2 available from the ECB; we included the four largest balances, namely those of  Germany, Italy, Spain and the ECB itself.   The...
  • Gold Sector – An Obscure Indicator Provides a Signal
    The Goldminbi In recent weeks gold apparently decided it would be a good time to masquerade as an emerging market currency and it started mirroring the Chinese yuan of all things. Since the latter is non-convertible this almost feels like an insult of sorts. As an aside to this, bitcoin seems to be frantically searching for a new position somewhere between the South African rand the Turkish lira. The bears are busy dancing on their graves.   Generally speaking bears have little to...
  • When the Freaks Run Wild
      Conditioned to Absurdity The unpleasant sight of a physical absurdity is both grotesque and interesting.  Only the most disciplined individual can resist an extra peek at a three-legged hunch back with face tattoos.  The disfigurement has the odd effect of turning the stomach and twisting the mind in unison.   Francesco Lentini, the three-legged man. Born in Sicily in 1881 with “three legs, four feet, sixteen toes and two pair of functioning genitals” he made a career of...
  • What Have You Done For Me Lately? Precious Metals Supply and Demand
      Aragorn's Law or the Mysterious Absence of the Mad Rush Last week the price of gold dropped $8, and that of silver 4 cents.  There is an interesting feature of our very marvel of a modern monetary system. We have written about this before. It sets up a conflict, between the perverse incentive it administers, and the desire to protect yourself in the long term.   Answer: usually when it is too late... [PT]   Consider gold. Many people know they should own it. They...
  • An Inquiry into Austrian Investing: Profits, Protection and Pitfalls
    Incrementum Advisory Board Discussion Q3 2018 with Special Guest Kevin Duffy “From a marketing perspective it pays to be overconfident, especially in the short term. The higher your conviction the easier it will be to market your investment ideas. I think the Austrian School is at a disadvantage here because it’s more difficult to be confident about your qualitative predictions and even in terms of investment advice it is particularly difficult to be confident in these times because we...
  • Climbing the Milligram Ladder - Precious Metals Supply and Demand
    FRN Muscle Flexing Shh, don’t tell the dollar-paradigm folks that the dollar went up 0.2mg gold this week. Or if that hasn’t blown your mind, the dollar went up 0.01 grams of silver. It’s less uncomfortable to say that gold went down $10, and silver fell $0.08. It doesn’t force anyone to confront their deeply-held beliefs about money. But it does have its own Medieval retrograde motion to explain.   Even the freaking leprechaun is now offering government scrip...  this really...
  • Introducing the Seasonax Web App
      Closing the Affordability Gap Up until recently, the Seasonax app was only available to users of Bloomberg or Reuters terminals, putting it out of reach of most non-institutional investors. This has now changed. A  HYPERLINK ""web-based version has become available which anyone can use, and it comes at a much lower price point as well. When visiting the site where the app is hosted, this is the welcome screen:   Featured patterns at the Seasonax web app...
  • Wall Street - Island of the Blessed
    Which Disturbance in the Farce can be Profitably Ignored Today? There has been some talk about submerging market turmoil recently and the term "contagion” has seen an unexpected revival in popularity – on Friday that is, which is an eternity ago. As we have pointed out previously, the action is no longer in line with the “synchronized global expansion” narrative, which means with respect to Wall Street that it is best ignored.   Misbehaving EM currencies – the Turkish lira...
  • Fundamental Price of Gold Decouples Slightly - Precious Metals Supply and Demand
    The Fundamental Price has Deteriorated, but... Let us look at the only true picture of supply and demand in the gold and silver markets, i.e., the basis. After peaking at the end of April, our model of the fundamental price of gold came down to the level it reached last November. $1,300. Which is below the level it inhabited since Q2 2017. We will look at an updated picture of the supply and demand picture. But first, here is the chart of the prices of gold and silver.   Gold and...
  • The Fake Promise of Adult Day Care
      Cold Dark Clouds The sun always shines brightest in the northern hemisphere during summer’s dog days.  Here in America, from sea to shining sea, the nation burns hot.  But, all the while, cold dark clouds have descended over the land of the free.   In case you ever wondered - yes, they really did say it... [PT]   For example, Senator Mark Warner – an absolute goober – is currently running interference for the Democrats on a proposal to silence political...

Support Acting Man

Item Guides


The Review Insider

Dog Blow

Austrian Theory and Investment



THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Mish Talk

Buy Silver Now!
Buy Gold Now!