Specter of Russian Capital Controls Puts Market on Edge


By Vladimir Kuznetsov and Ksenia Galouchko

Holders of Russia’s ruble-denominated bonds, stung by the worst losses in emerging markets in the third quarter, are weighing the consequences of possible capital controls as the currency sinks.

“It would be very negative for your investments in the local currency,” Peter Schottmueller, who helps manage $17 billion as head of emerging-market fixed income at Deka Investment GmbH in Frankfurt, said by e-mail yesterday. Foreign ownership of ruble bonds has dropped and any curbs on capital flows would further “increase the investment risk,” he said.

Russia removed its last restrictions eight years ago after imposing them in 1998, when the ruble’s drop led to a default on sovereign local-currency debt. Implementing the curbs again risks further damaging President Vladimir Putin’s ambition of turning Moscow into a financial hub at a time when escalating U.S. and European Union sanctions over the Ukraine crisis are already limiting access to global capital markets.

The yield on Russia’s 10-year bonds increased to a one-week high and the ruble slid to a record low yesterday after two officials with direct knowledge of the discussions said the Bank of Russia is weighing temporary capital curbs should the flow of money out of the country intensify. The ruble recovered most losses after the central bank said it wasn’t considering imposing limits on cross-border flows of money.

Capital Flight

Government ruble notes lost 16 percent in dollar terms last quarter, the biggest decline among sovereigns in the Bloomberg Emerging Market Local Sovereign Index, which dropped 1 percent.

What Are Capital Controls?

Outflows soared to $74.6 billion in the first half, compared with $61 billion in all of 2013, central bank data show, as sanctions have threatened to push Russia’s $2 trillion economy into a recession. As much as $120 billion may leave the country this year, Interfax cited Deputy Economy Minister Alexey Vedev as saying Sept. 22.

The ruble fell beyond 44.40 against the Bank of Russia’s basket of dollars and euros yesterday, the level at which the central bank said it would intervene. It then pared declines and traded 0.2 percent lower at 44.3578 at 11:43 a.m. in Moscow, retreating for a fifth day.

“Outflows should sharply increase now,” Stanislav Kopylov, who helps manage 45 billion rubles ($1.14 billion) at UralSib Asset Management in Moscow, said by phone yesterday. “When you’re threatened like that, you need to urgently pull out the cash.”

Worst Performance

The currency slid 14 percent versus the dollar in the three months ended yesterday, the worst drop among 24 emerging markets tracked by Bloomberg. The yield on 10-year bonds increased 102 basis points, the most after Turkish debt in developing nations.

The ruble’s share of global trading dropped to 0.4 percent in August from 0.6 percent since 2012, falling five places to rank 18th most-traded in the world, according to the Society for Worldwide Interbank Financial Telecommunication, or SWIFT.

Russia’s central bank is studying all possible scenarios on how to implement capital controls, according to the people, who asked not to be identified because no decision was made. They gave no timeline and said such measures would be preventative.

The country probably won’t take the step unless its currency reserves start dropping by more than $20 billion a month, Vladimir Osakovskiy, an economist at Bank of America Corp., said in e-mailed comments yesterday.

Lost Efforts

The discussions are the latest sign that sanctions are hurting Russia and making its central bank rethink policies it sought to avoid. German Chancellor Angela Merkel said the EU and the U.S. may be facing a long confrontation with Russia.

The central bank widened the ruble’s trading band in August to prepare to adopt a free float next year, a policy shift that would make interest rates rather than tapping reserves the primary mechanism for controlling currency movements and managing inflation. The bank last intervened in May.

“Capital controls will erase the job the central bank and the government have done in promoting the ruble, not only as a national currency, but as a currency used in settlements with international partners,” Alexander Losev, the chief executive officer of Sputnik Asset Management, said by e-mail yesterday. Such a move would also weaken “efforts in achieving ruble stability,” he said.

To contact the reporters on this story: Vladimir Kuznetsov in Moscow at [email protected]; Ksenia Galouchko in Moscow at [email protected]

To contact the editors responsible for this story: Wojciech Moskwa at [email protected] Daliah Merzaban


Please enter your comment!
Please enter your name here