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Russia’s reserves ample, may not default: Rabo Bank

The recent run on Russian currency ruble has given birth to murmurs that Russia may default and that capital control is on the cards. Expressing his views on the subject, Rabo Bank’s Piotr Matys explains why such a possibility is remote despite the fact that an emergency rate hike has done little to stop ruble’s slide.

The recent run on Russian currency ruble has given birth to murmurs that Russia may default and that capital control is on the cards. Expressing his views on the subject, Rabo Bank’s Piotr Matys explains why such a possibility is remote despite the fact that an emergency rate hike has done little to stop ruble’s slide.

Below is the transcript of Piotr Matys’ interview with Sumaira Abidi and Reema Tendulkar on CNBC-TV18.

Sumaira: Do you see a situation getting so bad that Russia might have to look at capital controls or do you think stability could return to Russia before they need to get to the step of applying capital controls?

A: I think that implementing capital controls would be a very drastic measure. Only few weeks ago the odds for such option were fairly low. However, developments over the past 48 hours increased the odds that capital controls could be implemented. This is not my baseline scenario, I think the central bank will keep using other measures mainly large scale Fx interventions will boost Fx liquidity, will provide support to Russian banks. However, if Russian reserves fall by another USD 80-100 billion then speculations about capital controls will for sure intensify but at this stage I don’t think that Russian officials are ready to use such drastic measures.

Reema: Do you see the ruble slide stopping when crude stabilises. How do you see crude over the next two-four weeks?

A: The sharp fall in oil prices definitely contributed to the ruble selloff. So if oil prices stabilise then it is fair to assume that it will have positive impact on the Russian currency as well. However we assume that oil prices throughout next year will not be significantly higher from current levels. So if oil averages around USD 70-75 per barrel throughout next year then it will be not enough for Russian economy to avoid recession. Yes, the ruble should most likely stabilise but in terms of economic activity outlook is still bleak and we assume that the Russian economy is going to contract by anything between 1-2 percent next year.

Sumaira: Could a political crisis be on the horizon?

A: I am not a political analyst. As we know support for President Putin is at high levels. We have to monitor further developments and if support for President Putin starts falling quite rapidly then defiantly speculations about some sort of political crisis unfolding in Russia will increase. However at this stage President Putin’s position in Russia is so strong that it is very unlikely that the opposition will be strong enough to challenge him for power. Political tension may increase but I do not expect that President Putin will be challenged for power by the opposition which at this stage is too weak to do so.

Reema: What are the chances of debt default by Russia?

A: Yes it is definitely reasonable to assume that bad debt is going to increase substantially throughout next year and there could be potentially a wave of bankruptcies among Russian companies and households — especially households exposed to foreign debts are going to get hit the hardest.

The issue of bad debt is going to play a significant role throughout next year. But I think it is too early to speak about Russia defaulting at this time. They still have quite substantial buffers in terms of their foreign reserves standing at USD 416 billion at the moment. At this I don’t expect Russia is going to default. Definitely there is a risk that the ruble sell off will lead to financial crisis but I think it is too early to speak about Russia defaulting next year or within next few years.

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