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Bloomberg 15.08.2014 Fedor Bizikov's comment "Ruble Carry Goes Belly-Up as Sanctions Drub Rates: Russia Credit"

Ruble Carry Goes Belly-Up as Sanctions Drub Rates: Russia Credit
2014-08-15 15:46:44.636 GMT
By Vladimir Kuznetsov
Aug. 15 (Bloomberg) -- Carry-trade investors betting on
ruble gains have seen their good fortunes sour as intensifying
sanctions against Russia overshadow the third-highest interest
rates in Europe.
Borrowing in dollars to fund purchases of ruble debt posted
the biggest losses in emerging markets since June 30, sliding
4.6 percent, after handing investors the third-best returns in
the second quarter, according to data compiled by Bloomberg. A
surprise interest-rate increase July 25 failed to stem the drop
as new U.S. and European sanctions spurred the biggest currency
price swings among 24 developing nations.
While the central bank benchmark is 2.5 percentage points
higher than before President Vladimir Putin’s incursion into
Crimea in March, it hasn’t been sufficient to lure carry traders
as the conflict in Ukraine worsened. Local-currency bonds slid
the most among peers since the U.S. imposed harsher penalties on
July 16, tumbling 6.6 percent, prompting Russia to retaliate
with a food-import ban this month.
“It’s not smart doing carry trades in an unstable
country,” Dmitry Kosmodemiyanskiy, a money manager at Otkritie
Asset Management in Moscow, said by e-mail yesterday. “An
investor will only be willing to do this deal if he’s confident
in the stability and safety of his cash.”

Higher Rates

Russia’s central bank raised its key rate to 8 percent last
month, higher than all European peers apart from Turkey and
Ukraine, according to data compiled by Bloomberg. The ruble has
weakened 3.3 percent against the dollar since the rate increase
amid the standoff between Russia and the U.S.
Carry traders using the ruble weren’t deterred in the
second quarter, earning 5.8 percent, the most after Argentina
and Colombia. The trade involves borrowing in countries with
lower interest rates to invest in higher-yielding assets. The
risk is that currency swings can wipe out the gains.
Rate increases in March and April helped spur buying in
Russian assets, sending the nation’s stock index into a bull
market and the currency to a five-month high in June. Now
analysts project the ruble will to weaken to 36.30 per dollar by
year-end, from 36.188 at 4:45 p.m. in Londonw according to the
median estimate in a Bloomberg survey.

‘Absolutely Unpredictable’

Higher rates are still luring some traders, otherwise the
ruble “may have been sold off more aggressively,” Vladimir
Kolychev, a Moscow-based analyst at VTB Capital, said by e-mail
yesterday. “The carry is still working.”
Any substantial drop in the Ukraine risk premium may
trigger a “very strong” rally in the ruble, according to
Konstantin Artemov, a money manager at Raiffeisen Asset
Management in Moscow.
The currency has strengthened 0.3 percent this week as
Ukraine signaled it may allow an aid convoy from Russia to enter
its war-torn eastern regions. Putin pledged yesterday to work to
halt the conflict that’s flared for months between pro-Russian
separatists and government forces.
Outflows from Russian mutual funds accelerated to 663
million rubles ($18 million) in July, four times more than June,
and are on track for a record this year, data from
Investfunds.ru showed yesterday. One-week historical price
volatility for the currency climbed 43 basis points this quarter
to 8.47 percent today. Only price swings for the Ukrainian
hryvnia and the Syrian pound are larger.
The U.S. and European sanctions make the political future
“absolutely unpredictable,” Fedor Bizikov, a money manager at
GHP Group in Moscow, said by phone yesterday. “This stops
investors from making bets.”