Information Pack
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INFORMATION PACK The ruble is plumbing record lows as the U.S. and EU tighten sanctions against Russia because of its involvement in Ukraine. This is set against the backdrop of anxiety about developing-nation assets as the U.S. Federal Reserve prepares to lift interest rates, threatening to draw investment away from riskier assets. Investors and traders can use Bloomberg solutions to monitor the gyrating ruble, examine the interconnectedness of Russia’s economy with Europe and the rest of the world, weigh risks and spot opportunities. This document provides a glimpse of how Bloomberg functions can help you. THE IMPACT OF SANCTIONS Russia’s economy has been dented as sanctions bite. will touch 40 per the dollar during the next six months, The ruble has slumped 14 percent this year against the according to data compiled by Bloomberg. The data uses dollar and Russian banks and corporates are struggling the implied volatility quotes from the FX options market given to raise finance. While the Sept. 5 cease-fire between to Bloomberg by leading major and local Russian banks and Ukrainian government and Russia separatists increased therefore captures their perception of spot movements. hopes of a lasting truce, a lot of economic damage has already been done: consensus GDP forecasts for Russia in 2014 have been slashed to 0.3 percent from 2.2 percent at the beginning of the year, according to Bloomberg surveys. The tit-for-tat penalties have not only harmed Russia’s growth and stoked inflation — they also make a recovery in Europe more difficult. THREATS TO BANKS In the initial set of economic sanctions imposed in late July, the EU barred five state-owned Russian banks from selling shares or bonds in Europe, restricted the export of equipment to modernize the oil industry, prohibited new contracts to sell arms to Russia, and banned the export of machinery, electronics and other civilian products with military uses. With reduced funding to Russian banks and the interbank Ruble plummets as sanctions bite market rates rising an average 40 percent, many local banks in Russia may turn to the central bank for cheaper financing. The ruble’s implied volatility has increased recently with The shift in Russian banks’ funding mix may prompt the central option traders positioning for further weakness in the Russian bank to widen the range of instruments accepted as collateral, currency. The three months at-the-money USDRUB implied including mortgages, similar to European Central bank actions. volatility has increased by 3 vols up to 11.10 vols as of Sept. 10 from 8.15 vols at the beginning of the year, according The financial industry is a barometer of the Russian to Bloomberg data. While the three months 25 delta risk economy’s health. Banks are increasingly beholden to their reversal has gone up to 2.9 vols in favor of ruble puts from lender of last resort: borrowings from the central bank now 1.6 vols at the beginning of 2014. total $154 billion, representing 10 percent of total Russian bank liabilities excluding equity. Commercial banks’ loan-to- DEPENDENCY ON OIL & GAS deposit ratio was 105.4 percent with central bank funding Besides the banking sector, oil and gas is another pivotal and 133.2 percent without. Russian industry given it is the largest energy exporter in the world. U.S. and EU sanctions against Russia are targeting RUBLE ROCKED crude oil and related products, rather than natural gas The ruble has retreated 14 percent against the dollar this exports. The Russian economy is highly dependent on EU oil year, the most among 24 developing countries monitored by and gas exports, with crude oil exports accounting for half of Bloomberg with the exception of the Argentine peso. Trading Russia’s budget revenue. in ruble options indicates a 50 percent chance the currency SEPTEMBER 2014 / FX14 RUSSIA / {FFM<GO>} // 2 Countries depending on Russia Gas Russia seeks to increase trade with China With the exception of Gazprom and Novatek, Russia’s oil Russia has the opposite problem: as food retailers report on and gas majors are geared toward liquid gas production. earnings, it’s clear that prices are rising. Russian oil companies such as Rosneft, Lukoil and Tatneft make most of their money from crude oil and petroleum Metro Cash & Carry has warned that domestic food exports to European and Asian markets. A significant revenue suppliers are trying to increase food prices as local produce stream will be imperilled if current U.S. and EU sanctions is substituted for EU, Norwegian and U.S. equivalents which against the country persist. have been sanctioned. Immediate price increases of between 4 percent and 10 percent, as requested by some suppliers, The recent territorial disputes between Ukraine and Russia may fuel food inflation. As anticipated, salmon is proving one may spur new efforts in the EU to diversify energy supplies of the most difficult items to substitute, with Chile the likely using new pipelines, increasing liquefied natural gas alternative to Norway. imports, installing more renewable capacity and ramping up indigenous production via shale gas. The EU has pumped a Russian retailer X5 has played down the potential for gaps record volume of natural gas into underground inventories to to appear on the shelves of Russian supermarkets as it’s minimize the risk of shortages during the coming winter. confident that alternative suppliers can be found for most of the products affected by the government’s food-import ban. Likewise Russia has sought to diversify its customer base Fish, fruit and vegetables and cheese are likely to be the with Gazprom agreeing a 30-year gas-supply deal with China hardest to replace. Food inflation is already 9.8 percent in to reduce the reliance on Europe for gas export revenue and Russia, ahead of the 7.5 percent overall rate and it’s unlikely boost sales. Currently the biggest exports of gas go to Western that this will fall, potentially squeezing consumer spending. Europe while CIS countries and Central Asia combined accounting for only half of exports to Western Europe. — Annie Grebenyuk, Bloomberg Foreign Exchange Application PEACHES TO CABBAGE Specialist and Bloomberg Intelligence Analysts In Europe, the restrictions have pushed prices lower for everything from Spanish peaches to Latvian cabbage and Finnish dairy products, according to Brussels-based farm lobby Copa-Cogeca. European retailers are already suffering from slow sales and are likely to see further price deflation for perishable products, putting pressure on margins. SEPTEMBER 2014 / FX14 RUSSIA / {FFM<GO>} // 3 TRACKING THE RUSSIAN RUBLE AMID MOUNTING SANCTIONS Since the annexation of Crimea in March, Russia has been subjected to increasingly stringent economic sanctions, mainly led by the U.S. and EU members. After an initial rally, the ruble is showing signs of stress. Keep track of the ruble using Bloomberg’s graph, swap and option analytics. Run {RUBBASK Curncy GP<GO>} to see how the daily moving average of the ruble basket continues upward, despite Central Bank of Russia measures to stabilize the currency. The basket, comprised of 55 percent USD/ RUB and 45 percent EUR/RUB, is closely watched by the CBR. Russia’s international reserves have decreased by over $40 billion in an effort to stabilize the ruble, while interest rates have gone up. The key rate was 5.5 percent in February and has been raised to 8 percent now, which helps make shorting the ruble more expensive. Multiple Security Chart The recent intensification of trade sanctions contributed to a spike in USDRUB options trading. Run Swap Data Repository Volumes {SDRV<GO>} and click the ‘3) FX’ tab to view volumes. Only options and NDF trades are reported, excluding spot and forward transactions. Options volume spiked around the end of July, when the EU announced sanctions. SDRV SEPTEMBER 2014 / FX14 RUSSIA / {FFM<GO>} // 4 Delve deeper into the composition of the options trades hitting the market now using {USDRUB Curncy OMST<GO>}. Click the ‘New’ button and select a date range of 01-Jul- 2014 through 31-Jul-2014 to see the strikes traded over the last month. The long right ‘fat tail’ to the strike distribution suggests that market participants anticipate large movements to the topside. To contact the author of this {FFM<GO>} article: Matt Gorelik at +1-415-617-7183 or [email protected] Published Aug. 15 OMST DETERMINING THE DIRECTION OF THE RUSSIAN RUBLE Bloomberg was the first to report that Russia unexpectedly raised its key interest rate 150 basis points on March 3 as the threat of President Vladimir Putin invading Ukraine prompted the ruble to slump. Use Bloomberg tools to analyze market expectations of where the ruble is headed. Even with the ruble’s weakness this year, most market analysts are predicting that the currency will strengthen during the next few months. Run {FXFC<GO>} to analyze these forecasts. Set the ‘Region’ to be ‘EMEA’. Scroll to the second page to view the ‘USDRUB’ forecasts. The USDRUB spot rate as of March 6 was 36.2. The median forecasts for the second and third quarters of this year suggest the ruble will strengthen to 35 per dollar. To see the details of the individual forecasts, click on ‘Russian Ruble USDRUB’. The screen will bring up the highest, lowest, median and mean forecasts. In the bottom table, click on the gray titles to sort the forecasts in either Analyst Forecasts ascending or descending orders. SEPTEMBER 2014 / FX14 RUSSIA / {FFM<GO>} // 5 Hit <MENU> to return to the previous screen. To view the most accurate forecasters, click on the gray ‘Ranking’ tab at the top of the screen. Run {FXFM<GO>}, which provides information on FX options market expectations driven by supply and demand rather than macroeconomic analysis.