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Ruble Drops to 2016 Low as Traders Ask How Far Sanctions Will Go

ForexAug 09, 2018 07:40AM ET
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© Bloomberg. An employee feeds ruble banknotes through a validation machine in payment for iPhone X smartphones at a re:Store Apple Inc. retailer on the first day of sale in Moscow, Russia, on Friday, Nov. 3, 2017. Supported by resurgent iPad and Mac sales, the 10-year anniversary iPhone will help push revenue to a record high of $84 billion to $87 billion in the quarter ending in late December, Apple said in a statement. Photographer: Andrey Rudakov/Bloomberg

(Bloomberg) -- The ruble extended its steepest slide in almost two years as a fresh round of U.S. sanctions against Russia deepened concern about what could be targeted next.

Investors who had been building long positions in the currency earlier in the summer rushed for the exit, causing a two-day plunge of as much as 5.1 percent. Analysts at Citibank said it looks like traders are already pricing in a worst-case scenario of sanctions on banks and new sovereign debt.

“Now we may have the problem that people will cut at the same time using a very small window,” said Koon Chow, a strategist at Union Bancaire Privee in London. “The market should have already adjusted yesterday but the risk is that there could still be follow-through as people have simply been unable to get out.”

The sanctions announced late Wednesday and taking effect this month will limit exports to Russia of U.S. goods and technology considered sensitive on national security grounds, according to a State Department official who briefed reporters on condition of anonymity. The restrictions, which aim to punish Russia for a nerve-agent attack in the U.K., may be followed by a round of more sweeping penalties later this year, they said.

The currency’s decline on Wednesday appeared to begin after Russian media published the full text of a separate bill introduced in Washington last week that seeks “crushing sanctions” for election meddling.

Friendly Skies?

Russia’s largest air carrier, Aeroflot PJSC, plunged to an almost two-year low on concern that the next set of sanctions could include a measure that would suspend flights to the U.S.

Sovereign ruble bond yields rose to the highest since 2016 and the cost of insuring dollar debt against default through credit-default swaps jumped to 154 basis points, the highest in a year. Moves were exacerbated by a drop in oil prices this week.

The two-day rout has reignited the kind of concerns that swept the market in April after the U.S. introduced penalties against a raft of billionaires and their assets. Now as then, investors are starting to question how far lawmakers in Washington will be prepared to go in their bid to punish Russia over its foreign-policy moves and claims it meddled in U.S. elections.

The U.S. has been imposing sanctions on Russia since the invasion of Crimea in 2014. To date, most of the measures target specific individuals or industries without having much broader market impact, but there are also measures which bar certain Russian companies from issuing new stock and bonds. The fallout from a move to target sovereign debt or the banking sector would be much wider and the Treasury has warned against going down that route.

“It’s hard to tell the extent of the sell-off,” said Viktor Szabo, a money manager at Aberdeen Standard in London. “The question is whether these sanctions will reach key energy and financial names and also the sovereign.”

Ruble Drops to 2016 Low as Traders Ask How Far Sanctions Will Go

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