After Russia exchange traded funds or ETFs with large exposure to the country comprised four of the five worst-performing non-leveraged ETFs on Monday, Tuesday promises to be another interesting day for these embattled funds after Russia’s central bank announced a stunning interest rate increase after the close of U.S. markets Monday.
In an effort stem ruble declines, Russia’s Central bank boosted its benchmark interest rate to 17% from 10.5%. The rate hike was the second since Thursday and in the span of less than a week Russian borrowing costs have more than doubled from 8%.
“From 16 December 2014 the Bank of Russia Board of Directors decided to raise the Bank of Russia key rate to 17.00 percent per annum. This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks. From 16 December 2014 in order to strengthen the efficiency of monetary policy loans secured by non-marketable assets or guarantees for 2 to 549 days will be provided at a floating interest rate, set at the Bank of Russia key rate level, increased by 1.75 percentage points (up to the present these loans for 2 to 90 days were provided at fixed rate),” according to a statement issued by the Central Bank of the Russian Federation.
The ruble has been in free fall against the U.S. dollar. On Nov. 23, $1 bought just over 44 rubles, but as of late Monday, $1 bought 65.6 rubles. Since Nov. 23, the Market Vectors Russia ETF (NYSEArca: RSX) has plunged 35.1%.
Although Russia has $38 billion of dollar-denominated government of which just $6 billion of interest and principal payments is due next year, there concerns linger that Russia is flirting with another financial crisis. In just a week, odds of a Russian default have surged more than 40%. [Russia ETFs Slide as Default Concerns Rise]
Russia appears intent on supporting the ruble by any means necessary.
“Moreover, for further expanse of credit institution ability to manage their foreign exchange liquidity it was decided to increase maximum allotment amount for 28-day FX REPO auctions from 1.5 to 5.0 billion USD and to conduct 12-month FX REPO auctions on weekly basis,” said the central bank in the statement.
Despite the efforts to save the ruble, RSX, the largest Russia ETF, trades at its lowest levels since March 2008. Russia is not alone in its drastic efforts to save a flailing currency, so there is something of a template for what traders can expect from Russia ETFs in the coming days.
Earlier this year, the Turkish central bank raised its overnight lending rate to 12% from 7.75% and more than doubled the overnight borrowing rate to 8% to 3.5% in one of the boldest moves by any central bank in recent memory to defend a flailing currency. That was Jan. 28. By Feb. 14, the iShares MSCI Turkey ETF (NYSEArca: TUR) had risen 5.5%. [Central Bank Salvation for Turkey ETF]
Market Vectors Russia ETF
