Russia will likely face a very hard landing

Russia is facing more troubles to come. Russia as the world third largest in currency reserve has drained more than 20% (from $598 billion in August downs to $487 billion) of its currency reserves. Investors are selling Russian assets as a 62% slump in the price of oil since July.

According to CMA Datavision prices, Credit-default swaps on Russian government bonds jumped to 7.82% of the amount insured from 6.14% yesterday. The yield on its 30-year dollar bonds increased to 10.47% from 9.1%, according to Bloomberg prices. The country’s credit-default swaps, a measure of insurance against debt default, reflect a cost of $750,000 to insure $10 million in bonds against default for five years, up from $625,000 Tuesday, according to Phoenix Partners Group. Investors have become more risk-averse as it comes to Russia, and the reduction in liquidity has crimped issuers of debt in Russia, who — like U.S. banks — are finding it difficult to roll over short-term debt.

In an attempt to defend the falling ruble and maintain some capital flows, the country raised interest rates overnight by 100 basis points to 12%, as it deals with declining foreign currency reserves, capital outflows and short-term debt issues among some of the nation’s largest investors.

From FT.com:

The decision by the Central Bank of Russia (CBR) to raise interest rates is unlikely to prevent further falls in the rouble, says Neil Shearing, emerging Europe economist at Capital Economics.

He estimates that the CBR has spent some $30bn defending the rouble since the start of August as it came under pressure from weaker oil prices and an outflow of capital since the conflict in South Ossetia.

“While the rouble is key to national confidence in the economy, the authorities will not want to repeat the mistakes made in the 1990s, when Russia’s reserves were frittered away defending an unsustainable currency peg.”

Mr Shearing says it is no coincidence that the rate announcement came on the day the authorities allowed the rouble to drop by 1 per cent against its euro/dollar basket. “Taken together, it seems the CBR is attempting to set a floor under the currency.”

However, a combination of falling energy prices and fragile investor risk appetite could cause the rouble to drop by about 5 per cent in 2009, he warns. “What’s more, higher rates will exacerbate the downturn in the real economy.

“Already-scarce credit will become more expensive. This, combined with falling oil prices, weaker demand from overseas and slower growth in real incomes could mean that GDP growth slumps to 3 per cent in 2009. Compared with the 8 per cent-plus rates seen over the past two years, that will feel like a very hard landing.”

ETFs/Stocks :

Market Vector Russia ETF Trust  RSX  12.48  -3.02 (-19.48%)

Related Posts :

Fitch downgraded 17 Emerging Markets, including Russia, South Korea, South Africa and Malaysia

Sources :

FT.com: View of the Day: Russian rouble rousing, November 12, 2008 15:31
Bloomberg: Russia Debt Risk Jumps After `Clumsy' Ruble Widening, Rate Rise,November 12, 2008 11:34 EST
Marketbeat@wsj: Russian Roulette, November 12, 2008, 11:24 am

Please Note!

This is generally never true. Before buying or selling any asset you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.