Russia faces ‘perfect storm’ as reserves vanish and derivatives flash default warnings

BNP Paribas says Russia no longer has enough reserves to cover external debt and enters this crisis ‘twice as levered’ as it was before the Lehman crash

Central bank data show that a blitz of currency intervention depleted reserves by $26bn in the two weeks to December 26, the fastest pace of erosion since the crisis in Ukraine erupted early last year.

Credit defaults swaps (CDS) measuring bankruptcy risk for Russia spiked violently on Tuesday, surging by 100 basis points to 630, before falling back slightly.

Markit says this implies a 32pc expectation of a sovereign default over the next five years, the highest since Western sanctions and crumbling oil prices combined to cripple the Russian economy.

Total reserves have fallen from $511bn to $388bn in a year. The Kremlin has already committed a third of what remains to bolster the domestic economy in 2015, greatly reducing the amount that can be used to defend the rouble.

The Institute for International Finance (IIF) says the danger line is $330bn, given the dollar liabilities of Russian companies and chronic capital flight.

Currency intervention did stabilise the exchange rate in late December after a spectacular crash threatened to spin out of control, but relief is proving short-lived.

The rouble weakened sharply to 64 against the dollar on Tuesday. It has slumped moe [sic] than 20pc since Christmas, with increasing contagion to Belarus, Georgia and other closely-linked economies.

There are signs that Russia’s crisis may undermine President Vladimir’s Putin’s Eurasian Economic Union before it has got off the ground. Belarus’s Alexander Lukashenko is already insisting that trade be carried out in US dollars, while Kazakhstan’s Nursultan Nazarbayev warned that the Russian crash poses a “major risk” to the new venture.

The rouble is trading in lockstep with Brent crude, which has continued its relentless slide this week, falling to a five-year low of $51.50 a barrel. “If oil drops to $45 or lower and stays there, Russia is going to face a big problem,” said Mikhail Liluashvili, from Oxford Economics. “The central bank will try to smooth volatility but they will have to let the rouble fall and this could push inflation to 20pc.”

Full article: Russia faces ‘perfect storm’ as reserves vanish and derivatives flash default warnings (The Telegraph)

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