Russia Capital Control Jitters Appear in Moscow-to-London Spread

SHAFAQNA (International Shia News Association) Evidence is surfacing in Russia’s bond market that investors are concerned President Vladimir Putin will impose capital controls to stem the ruble’s 39 percent plunge this year.

Bond buyers are demanding a growing premium to own ruble-denominated bonds traded in Moscow rather than ruble debt that trades in London and other international markets. The yield gap between the two securities has swelled to 0.66 percentage point, the widest since January 2013 and more than six times the average over the past two years, according to data compiled by Bloomberg. It had been as small as 0.03 percentage point in September.

While returns on the two bonds are affected equally by swings in the ruble, investors who hold the notes in Moscow also run the risk of having their money tied up if Russia were to impose restrictions on currency transactions, limitations that wouldn’t apply to owners of the overseas notes. The speculation has mounted after the plunge in oil, Russia’s top export, added to a ruble rout that began with the conflict in neighboring Ukraine.

Such measures are “likely and becoming more so as we’ve moved from sliding currency to sliding currency and dysfunctional onshore markets,” Paul McNamara, a money manager at GAM UK Ltd., said by e-mail from London. He said he’s avoiding the local bond market because he’s worried about capital controls. “Given the logic of Russian governance, using state power does seem likely.”

Record Yields

Yields on three-year ruble bonds trading in Russia have jumped 1.9 percentage points over the past week to a record 12.9 percent. The similar-maturity ruble bonds trading overseas, meanwhile, yield 12.24 percent, according to data compiled by Bloomberg. The 66-basis-point yield gap is the highest since January 2013, when Russia opened its local bond markets to foreign investors, and compares with an average 10 basis points over the past two years.

Russia has failed to stabilize the ruble even after raising benchmark borrowing costs four times this year and spending more than $90 billion in foreign reserves. The currency sank 2.3 percent yesterday to 53.7450 per dollar, within 2 percent of a record low reached Dec. 3.

A phone call and an e-mail to the Russian central bank’s press office weren’t returned after regular business hours in Moscow yesterday.

President Vladimir Putin, who said last month he has no plans to limit the flow of capital, asked the government and the central bank to work together to defend the currency on Dec. 4, promising “harsh” measures against speculators. Moments later, Finance Minister Anton Siluanov urged exporters such as OAO Rosneft to convert more of their foreign revenue into rubles, a move that Sputnik Asset Management and Bank of America Corp. say is tantamount to capital controls.

Money Outflows

Russian authorities are seeking ways to slow the ruble’s drop as U.S. and European sanctions over the conflict in Ukraine and oil’s slump into a bear market help drive the biggest capital outflows in six years. The retreat in the currency has helped boost prices of imports, pushing inflation to a three-year high of 9.1 percent in November.

The central bank pushed forward the schedule to let the ruble float freely, raised interest rates four percentage points this year and limited ruble liquidity via swaps. Twelve of 24 economists surveyed by Bloomberg predict the central bank will raise the benchmark rate at least a quarter percentage point from 9.5 percent this week, with the rest forecasting no change.

IMF’s View

While higher interest rates may bolster the ruble, they will also be a drag on Russia’s economy, which will probably contract 0.8 percent in 2015, the government said last week in its first acknowledgment that a recession is around the corner.

Net capital outflows from Russia are set to surge to $125 billion in 2014, according to the Economy Ministry. That would be the highest annual total since 2008, when $133.6 billion left the country, central bank data show.

Restrictions on capital flows have had mixed results in boosting investor confidence in a country’s economy. While failing to revive growth in countries such as Argentina and Venezuela, they helped Malaysia stabilize its currency during the Asian financial crisis in the late 1990s.

The International Monetary Fund, which has been an advocate for the free flow of capital historically, shifted its view in 2010, acknowledging that restrictions can forestall financial crises.


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