6 ms·

When a currency is devaluating but interest rates are low, the banks can borrow at low rate, sell rubles for dollars into sliding market, wait for ruble to slid

by DenisM 12y ago

When a currency is devaluating but interest rates are low, the banks can borrow at low rate, sell rubles for dollars into sliding market, wait for ruble to slide more, then repay the loan with cheaper rubles and make a big profit. The trouble is they also accelerate the slide, courtesy of the low rates. The central bank rate increase was likely done to head off that particular danger. Of course there are many other factors pressing the ruble down as well, which central bank can't control, but at least they are trying to prevent worseing the situation with their own hands. Long term high interest rates plus high cost of import supplies will likely strangle the economy though. Increased demand for domestic goods due to higher import prices is a good thing, but one needs capital to operate most businesses. When interest rates are high you can't borrow, and when political situation is flaky fewer people will want to buy equity.

vegabook 12y ago
at 17% the interest rate paid by the RUB shorts amounts to 0.046% per day, whereas just today trough to peak USDRUB moved 35%. In this environment unless you "do a Sweden/Slovakia" and ramp rates to 1000% by preventing offshore banks from funding onshore (a form of capital controls), a measly 600bps hike is meaningless.
- imaginenore 12y ago
  Spot on. They now have two options 1) Increase the rate to something truly insane like 1000% 2) Introduce currency controls and force everyone to use Ruble Neither of these options are good, but #2 seems much more likely.
  - chiph 12y ago
    Back in the Soviet days, it was illegal to take Rubles out of the country. It wouldn't surprise me to see that law reinstated.
    - imaginenore 12y ago
      Yeah, but back then they had two generations that never saw any dollars or iPhones or anything luxurious. It will be a bit more complicated this time. They might not have any other option though.
- JumpCrisscross 12y ago
  USBRUB moving 3500bps today tells us volatility is high. It does not indicate that we can expect an average move of 460 bps per day going forward. Carry trades perform horribly amidst increasing or ambiguous volatility. Their leveraged structures make sharp adverse swings game overs.
  - vegabook 12y ago
    sure - but we're talking RUB specs who are in it for a 5 day move. Nobody is expecting annualized vol of 566% (35% * sqrt(262)). RUB has been moving several chunky percentages daily for 2 weeks at least, and is down 50% against the dollar 3 months. 17% annualized doesn't make an iota of difference in that kind of market. Where it does make a difference is that long end bonds (OFZ 28s) are now yielding 15%. That's 15% for 13 years ;) Chunky yield in the long end. That will tempt the long term investors in (IF big if, they don't impose controls). Care to catch the falling knife?
    - foobarqux 12y ago
      Can you elaborate on the impact of capital controls? Are bond investors not able to trade out of their positions?
      - vegabook 12y ago
        The imposition of capital controls signals a country that is willing to trap money within its borders. That very fact is scary, and scary requires compensation. While that usually does not apply to what are classed as "long term" investors (direct purchasing of real assets in the country, purchasing of equities or bonds usually for a minimum time period, but NOT derivatives), it still requires an additional risk premium such that bonds will then need to be cheaper still (yield more) to compensate. The more relevant short term argument that I am referring to, is that if they were to "squeeze" the offshore market by disallowing or limiting the lending of RUB by local banks to offshore banks, then they could easily engineer a massive squeeze on the rouble offshore. That is all those people who are short RUB would suddenly find that "rolling" those positions (that is, borrowing RUB so you can sell it), suddenly costs a fortune. This is even true in FX forwards because ultimately these are a derivative of interest rates. If it costs you a fortune to "fund" the RUB, then the converse is that it pays you a fortune to lend RUB to the market. If it pays you handsomely simply to lend short-term RUB to the market, there is no reason to buy long term bonds, whose price must "compete" with the front end of the yield curve. In short: high short end rates will deter purchasing of any instrument with a (significantly) lower yield in the long end of the yield curve. If we were to get the above mentioned RUB squeeze to anything like 100% or higher, imagine how silly it would be to buy a long end bond at 15% (even though yes yes, long term it might still be a good investment - but that would require a long discussion about the implied path of future rates. Humans have proven themselves to be very short termist in markets and thus it is likely that long term bond prices would fall, dramatically in that scenario). So to answer your question directly, bond investors still would be able to trade out of their positions (though in a disorderly market even that cannot be taken for granted), but at a very low price.
- DenisM 12y ago
  At least it moved the situation from a no-brainer to "let's do the math before we short ruble". I don't know if it's going to be effective at all, just trying to find the most charitable explanation for CB.ru actions.
Kadin 12y ago
Well in the Bloomberg video (new link) the analyst says that projected "growth" for the Russian economy next year is -4% (so, not growth, but a contraction of 4%). At 14% interest rates there's basically no way to afford capital investments. Unless you are buying a printing press to print more money.
- deleted 12y ago
  [deleted]
- FractalNerve 12y ago
  I feel powerless over the ignorant political movement of people who, from my PoV, act like drones controlled by the media firing their ammunition and causing collateral damage. Be it Pro-/Contro Ukraine/Russia/America or Israel. We were good to each other, helpful and understanding and just because of a few leading politicians who can't go and fight each other on their own (without an army of soldiers dying for them), all of our lives shall suffer? I'm surely too blinded by the delusions of world-peace to come to grasp how people really are, but I hope to be misunderstanding before I give up my faith and let them destroy what we have build together. I fear forums whom I enjoyed becoming places of distrust, hatred and battle space against the other political 'side'. Where admins and moderators use their given powers to torture the unwanted. I have only recently seen an Isreali woman marrying an Iranian man on television loving each other. And don't think that all people agree to what the politicians have to say. We are better. If all fails, I still believe that: “Chaos often breeds life, while order breeds habit.” – Henry Adams Regarding 'Chaos' - this seem like a good read: http://www.halexandria.org/dward165.htm http://www.halexandria.org/dward165.htm Leading countries co-operate to limit capital-flow to Russia and this albeit sounding implausible to me, has direct influence on the economic liquidity. Implausible because I don't know how it would be possible for countries and companies to co-operate on such a scale on a capital market, where most notably personal profit leads the market over political decisions. I would be much more curious on which companies initiated the financial war and how they orchestrated their strategies, than the actual outcome, from the PoV of a mathematically and technologically fascinated guy. http://i.imgur.com/dnAWMT2.png http://i.imgur.com/dnAWMT2.png Thank you for reading so far.
  - 12y ago
trhway 12y ago
>the banks can borrow at low rate, sell rubles for dollars into sliding market, wait for ruble to slide more, then repay the loan with cheaper rubles and make a big profit. don't forget that even according to Russian government 60% of currency trading is insider based, ie. those banks and big traders are tipped (it is Russia after all - 137th place out of 170 rated in world corruption index) when for example Central Bank is to perform a ruble supporting "intervention". SEC and Fed cozying up to Wall St have nothing on how things are done in Moscow :) >Increased demand for domestic goods due to higher import prices is a good thing That would probably be the case for any normal country, yet not for Russia. Due to food import sanctions self-imposed by Russia, the price of foreign foods has increased, and the domestic foods prices immediately followed it as a result thus directly increasing consumer felt inflation. And there is no way Russia can noticeably increase food production, at practically any food prices. Instead the only option is to buy in other countries like Brazil, which means paying dollars which would mean even higher ruble prices for these foods on Russian market. Like during 199x years, for the next several years Russians will be back to dollars (and "black" accounting/contracts/salaries/offshoring) while government would implement significant obstacles to such "dollarisation" of the economy. Which means an immense business opportunities for BTC and other forms of money infrastructure allowing to perform "point A" - rubles in Russia - to "point B" - dollars in a Western country - and which are less subject to the [Russian] government control. It is kind of surreal - i was inside USSR when it collapsed due to the low oil prices of 198x. I didn't understand it back then. Now i watch this, similar, collapse of smaller, Putin's, version of USSR from comfortable "orchestra" seats (Silicon Valley) and can't stop wondering how things haven't changed a bit. Edit: to the "twelve40" below - i lived in the USSR/Russia the first 28 years of my life. One can write a huge number of PhD dissertations on the problems of Russian agriculture - legal, social, historical, economical, climate-related, psychological, etc... About the same question is why Russia can't produce a good car, at any prices :)
- twelve40 12y ago
  > there is no way Russia can noticeably increase food production, at practically any food prices Source?
  - 12y ago
deleted 12y ago
[deleted]

by DenisM 12y ago

vegabook 12y ago

at 17% the interest rate paid by the RUB shorts amounts to 0.046% per day, whereas just today trough to peak USDRUB moved 35%. In this environment unless you "do a Sweden/Slovakia" and ramp rates to 1000% by preventing offshore banks from funding onshore (a form of capital controls), a measly 600bps hike is meaningless.

imaginenore 12y ago
Spot on. They now have two options 1) Increase the rate to something truly insane like 1000% 2) Introduce currency controls and force everyone to use Ruble Neither of these options are good, but #2 seems much more likely.
- chiph 12y ago
  Back in the Soviet days, it was illegal to take Rubles out of the country. It wouldn't surprise me to see that law reinstated.
  - imaginenore 12y ago
    Yeah, but back then they had two generations that never saw any dollars or iPhones or anything luxurious. It will be a bit more complicated this time. They might not have any other option though.
JumpCrisscross 12y ago
USBRUB moving 3500bps today tells us volatility is high. It does not indicate that we can expect an average move of 460 bps per day going forward. Carry trades perform horribly amidst increasing or ambiguous volatility. Their leveraged structures make sharp adverse swings game overs.
- vegabook 12y ago
  sure - but we're talking RUB specs who are in it for a 5 day move. Nobody is expecting annualized vol of 566% (35% * sqrt(262)). RUB has been moving several chunky percentages daily for 2 weeks at least, and is down 50% against the dollar 3 months. 17% annualized doesn't make an iota of difference in that kind of market. Where it does make a difference is that long end bonds (OFZ 28s) are now yielding 15%. That's 15% for 13 years ;) Chunky yield in the long end. That will tempt the long term investors in (IF big if, they don't impose controls). Care to catch the falling knife?
  - foobarqux 12y ago
    Can you elaborate on the impact of capital controls? Are bond investors not able to trade out of their positions?
    - vegabook 12y ago
      The imposition of capital controls signals a country that is willing to trap money within its borders. That very fact is scary, and scary requires compensation. While that usually does not apply to what are classed as "long term" investors (direct purchasing of real assets in the country, purchasing of equities or bonds usually for a minimum time period, but NOT derivatives), it still requires an additional risk premium such that bonds will then need to be cheaper still (yield more) to compensate. The more relevant short term argument that I am referring to, is that if they were to "squeeze" the offshore market by disallowing or limiting the lending of RUB by local banks to offshore banks, then they could easily engineer a massive squeeze on the rouble offshore. That is all those people who are short RUB would suddenly find that "rolling" those positions (that is, borrowing RUB so you can sell it), suddenly costs a fortune. This is even true in FX forwards because ultimately these are a derivative of interest rates. If it costs you a fortune to "fund" the RUB, then the converse is that it pays you a fortune to lend RUB to the market. If it pays you handsomely simply to lend short-term RUB to the market, there is no reason to buy long term bonds, whose price must "compete" with the front end of the yield curve. In short: high short end rates will deter purchasing of any instrument with a (significantly) lower yield in the long end of the yield curve. If we were to get the above mentioned RUB squeeze to anything like 100% or higher, imagine how silly it would be to buy a long end bond at 15% (even though yes yes, long term it might still be a good investment - but that would require a long discussion about the implied path of future rates. Humans have proven themselves to be very short termist in markets and thus it is likely that long term bond prices would fall, dramatically in that scenario). So to answer your question directly, bond investors still would be able to trade out of their positions (though in a disorderly market even that cannot be taken for granted), but at a very low price.
DenisM 12y ago
At least it moved the situation from a no-brainer to "let's do the math before we short ruble". I don't know if it's going to be effective at all, just trying to find the most charitable explanation for CB.ru actions.

Kadin 12y ago

Well in the Bloomberg video (new link) the analyst says that projected "growth" for the Russian economy next year is -4% (so, not growth, but a contraction of 4%). At 14% interest rates there's basically no way to afford capital investments. Unless you are buying a printing press to print more money.

deleted 12y ago
[deleted]
FractalNerve 12y ago
I feel powerless over the ignorant political movement of people who, from my PoV, act like drones controlled by the media firing their ammunition and causing collateral damage. Be it Pro-/Contro Ukraine/Russia/America or Israel. We were good to each other, helpful and understanding and just because of a few leading politicians who can't go and fight each other on their own (without an army of soldiers dying for them), all of our lives shall suffer? I'm surely too blinded by the delusions of world-peace to come to grasp how people really are, but I hope to be misunderstanding before I give up my faith and let them destroy what we have build together. I fear forums whom I enjoyed becoming places of distrust, hatred and battle space against the other political 'side'. Where admins and moderators use their given powers to torture the unwanted. I have only recently seen an Isreali woman marrying an Iranian man on television loving each other. And don't think that all people agree to what the politicians have to say. We are better. If all fails, I still believe that: “Chaos often breeds life, while order breeds habit.” – Henry Adams Regarding 'Chaos' - this seem like a good read: http://www.halexandria.org/dward165.htm http://www.halexandria.org/dward165.htm Leading countries co-operate to limit capital-flow to Russia and this albeit sounding implausible to me, has direct influence on the economic liquidity. Implausible because I don't know how it would be possible for countries and companies to co-operate on such a scale on a capital market, where most notably personal profit leads the market over political decisions. I would be much more curious on which companies initiated the financial war and how they orchestrated their strategies, than the actual outcome, from the PoV of a mathematically and technologically fascinated guy. http://i.imgur.com/dnAWMT2.png http://i.imgur.com/dnAWMT2.png Thank you for reading so far.
- 12y ago

trhway 12y ago

>the banks can borrow at low rate, sell rubles for dollars into sliding market, wait for ruble to slide more, then repay the loan with cheaper rubles and make a big profit. don't forget that even according to Russian government 60% of currency trading is insider based, ie. those banks and big traders are tipped (it is Russia after all - 137th place out of 170 rated in world corruption index) when for example Central Bank is to perform a ruble supporting "intervention". SEC and Fed cozying up to Wall St have nothing on how things are done in Moscow :) >Increased demand for domestic goods due to higher import prices is a good thing That would probably be the case for any normal country, yet not for Russia. Due to food import sanctions self-imposed by Russia, the price of foreign foods has increased, and the domestic foods prices immediately followed it as a result thus directly increasing consumer felt inflation. And there is no way Russia can noticeably increase food production, at practically any food prices. Instead the only option is to buy in other countries like Brazil, which means paying dollars which would mean even higher ruble prices for these foods on Russian market. Like during 199x years, for the next several years Russians will be back to dollars (and "black" accounting/contracts/salaries/offshoring) while government would implement significant obstacles to such "dollarisation" of the economy. Which means an immense business opportunities for BTC and other forms of money infrastructure allowing to perform "point A" - rubles in Russia - to "point B" - dollars in a Western country - and which are less subject to the [Russian] government control. It is kind of surreal - i was inside USSR when it collapsed due to the low oil prices of 198x. I didn't understand it back then. Now i watch this, similar, collapse of smaller, Putin's, version of USSR from comfortable "orchestra" seats (Silicon Valley) and can't stop wondering how things haven't changed a bit. Edit: to the "twelve40" below - i lived in the USSR/Russia the first 28 years of my life. One can write a huge number of PhD dissertations on the problems of Russian agriculture - legal, social, historical, economical, climate-related, psychological, etc... About the same question is why Russia can't produce a good car, at any prices :)

twelve40 12y ago
> there is no way Russia can noticeably increase food production, at practically any food prices Source?
- 12y ago

deleted 12y ago

[deleted]