Russian President Vladimir Putin. Picture: SPUTNIK/ALEXEI DRUZHININ/KREMLIN
Russian President Vladimir Putin. Picture: SPUTNIK/ALEXEI DRUZHININ/KREMLIN

Russia’s rouble tumbled the most in emerging markets on Wednesday, erasing more than a fifth of its value so far this year after Brent crude sank below $27 per barrel.

Fears of a worldwide recession and a flight to the dollar are squeezing all risky assets, but the markets of the world’s biggest energy exporter are being hit particularly hard after Russian President Vladimir Putin plunged into an oil-price war with Saudi Arabia.

Russian local currency bonds and the rouble were one of the biggest overweight calls in the asset class last year. Now the rouble’s 22% plunge for the year to date is the worst performance globally.

While central banks from developed nations to emerging markets have come forward with emergency rate cuts to help their battered economies, Russia is seen bucking the trend; 34 out of 35 economists in a Bloomberg survey expect governor Elvira Nabiullina to end a run of six cuts and put rates on hold on Friday in a bid to avoid weakening the currency.

Market snapshot:

  • Rouble sinks 5.2% to 79.6/$, weakest since February 2016
    • Nordea analysts Grigory Zhirnov and Tatiana Evdokimova see the currency trading at 75-82 if Brent stays between $20 and $30. If it nears the higher end of that range, Bank of Russia could intervene in the market “to limit financial stability risks”, they write.
  • Rouble’s one-week implied volatility is the highest globally apart from the Brazilian real at 43.5%.
  • 10-year rouble-bond yields jump 31 basis points (bps) to 8.33%, the highest in almost a year.
  • Forward-rate agreements currently predict 169bps of hikes over the coming three months; they predicted cuts at the start of the month.

Piotr Matys is the sole economist predicting a cut on Friday. Nabiullina will be weighing the rouble against a potential recession, making the direction of the rate decision a “very close call”. The impact of the rouble’s drop on inflation will be more muted than in 2014, said Matys, who predicts a 50bps reduction to 5.5%.

“When central banks in both developed and emerging economies are slashing interest rates at emergency meetings, perhaps we should seriously consider the possibility of a cut in Russia,” he said.

Bloomberg