Dollar purge at Russian banks has rouble and Eurobonds in crosshairs

Russia’s efforts to end its financial industry’s reliance on dollars are threatening to claim a surprising victim: the rouble itself.Fresh off a shortage of dollars in October when higher reserve requirements set off outflows from corporate accounts, Russian companies are finding no better use for their foreign cash than to repay external debt. As a result, lenders’ foreign-currency liabilities dropped to the lowest since the peak of the rouble crisis in December 2014.Policy makers across the former Soviet Union have turned to the task of “de-dollarisation” after the crash in energy prices and volatility in the exchange rate showed how vulnerable their economies remain to changes in the value of their currencies. Russia’s central bank last week claimed success in its efforts to counter the use of dollars, pointing to increasing rouble deposits and loans in the local currency growing at the expense of foreign-exchange credit.The risk is that the dwindling currency stash could put the rouble under strain should banks not be able to meet demand by local companies seeking dollars to finance transactions and rush to the foreign currency market to buy them.“This can create a panic like the one in December 2014,” said Sberbank CIB analyst Iskander Lutsko. Still, the central bank remains “the lender of last resort and can always support the market via FX repo financing.”For now, the Bank of Russia is refraining from extending more foreign currency. It only offered $200mn in one- and four-week repurchase auctions this week, compared with $3.2bn in the previous seven days.The three-month currency swap rate fell to 8.6%, the lowest since October 2014, compared with 10.62% for the benchmark MosPrime rate. That means banks are ready to charge 202 basis points less for their roubles if they get dollars in return.Liabilities in dollars and euros at Russian banks shrank in October to $350.5bn, or 27.8% of the total. That’s the lowest since late 2014, when falling oil prices and concerns about the ability of local companies to repay foreign debt after western sanctions drove the rouble to historical lows.Sanctions that forbid entities in the US and the European Union from lending for more than 30 days to some of Russia’s biggest companies, from its top oil producer Rosneft PJSC to the biggest lender Sberbank, are still in place. At the same time, near-zero interest rates in developed countries spilled over into the Russian financial system, making dollar deposits unattractive for companies.“Although current market sentiment is favourable for Russian companies to refinance their debt obligations,” many of them prefer to use their stockpiled dollars to redeem outstanding debt or buy it back, Sberbank CIB’s Lutsko said.Russian banks responded to the depletion of foreign currency by their corporate customers by withdrawing cash from their correspondent accounts abroad. Cash parked at foreign banks dropped to 5.1% of all assets in October, the lowest level since May 2008, Bank of Russia data show.“Russian banks have exhausted their main source of bringing money from abroad,” Denis Poryvay, a fixed-income analyst at Raiffeisenbank in Moscow, said by e-mail.If currency withdrawals persist and banks aren’t able to further drain their correspondent accounts, lenders may start cashing out of their investment in foreign-exchange assets. At the top of the list are Eurobonds of Russian issuers. The country’s lenders held almost $55bn of foreign-currency bonds as of November 1, central bank data show.“If there are big sales in Eurobonds, this may lead to a spike in yields and as a consequence the rising cost of foreign-currency funding on the local market,” Poryvay said.