April 11, 2018 / 7:39 AM / 15 days ago

Rouble slides to 2016 lows on sanctions sell-off, Syria tensions

MOSCOW (Reuters) - The rouble fell on Wednesday to its lowest levels since 2016 as tensions with the United States over new punitive sanctions and the conflict in Syria eclipsed any benefit from higher oil prices.

The Russian market has been in a sharp sell-off since the United States imposed new sanctions against Moscow on April 6, targeting some of Russia’s biggest companies and most prominent businessmen.

Tensions between Moscow and Washington escalated further on Wednesday after Russia warned that any U.S. missiles fired at Syria over a suspected chemical weapons attack would be shot down. U.S. President Donald Trump said Russia should “get ready” and missiles “will be coming.”

Shortly after Trump’s statement, the rouble hit 65.06 versus the U.S. dollar on the Moscow Exchange, its weakest level since late November 2016, and losing more than 11 percent of its value since the sanctions were imposed.

While fundamental factors, such as the state of the Russian economy and macroeconomic policies remained unchanged, risk aversion towards Russian assets has soared in recent days.

The market is now closely watching for an indication of how Moscow will respond to the sanctions and any U.S. action in Syria.

Russian Prime Minister Dmitry Medvedev said retaliation to the sanctions ought to be “appropriate”, but also that Moscow should look at imported U.S. goods and U.S. companies operating in Russia when considering its response.

In a sign that the rouble’s drop was causing concern for authorities, Finance Minister Anton Siluanov said Russia had put purchases of foreign currency for its reserves on hold to avoid extra pressure on the falling currency.

“These purchases were not carried out and will be carried out later in order not to have additional impact on the situation on the currency market,” Siluanov said.

Central bank data showed the finance ministry did not buy any foreign currency for its reserves on Monday.

As of 1345 GMT, the rouble was 2.49 percent weaker on the day at 64.59. Versus the euro, the rouble shed 2.7 percent to 79.95, having earlier slid beyond the psychological threshold of 80 to 80.50, a level last seen in March 2016.

“Macroeconomic indicators suggest the rouble is massively undervalued,” Otkritie Brokerage said in a note.

The market has largely ignored a rise in prices for oil, Russia’s main export. Brent crude futures rose to $71.34 on Tuesday and hovered at around $71.70 on Wednesday. <O/R>

“With the current level of oil prices, the rouble looks fundamentally undervalued: according to our model, USDRUB should be not higher than 58 now,” VTB Capital analysts said in a note.

“However, more than anything else USDRUB is now being driven by flows, which might well remain relatively skewed to the bid side, if hedging persists.”

BUYING OPPORTUNITIES

The impact of the latest U.S. sanctions against 17 senior Russian government officials, seven so-called “oligarchs” and 12 companies they own or control has spread across Russian markets and risks derailing a fragile economic recovery which had just begun to take hold following the Kremlin’s last confrontation with the West in 2014.

Tim Ash at BlueBay Asset Management said Russia would struggle under the weight of any further sanctions imposed by the U.S. Treasury’s Office of Foreign Assets Control (OFAC).

“I have read a lot of waffle in the last few days talking about Russia’s solid macro fundamentals,” he wrote in a note. “Good luck with that when/if further OFAC sanctions hit hard if we do see further escalation.”

The volatility and uncertainty triggered by the latest round of sanctions has prompted some companies to change their plans, but also providing buying opportunities.

Russian unit of Volkswagen Bank said it had postponed a planned bond issue worth 5 billion roubles ($78.34 million) due to unfavourable market conditions, Interfax reported.

At the same time, Novatek, Russia’s largest independent gas producer, said it bought back 482,840 ordinary shares from the market on Tuesday. Shares in Novatek dropped to as low as 656.3 roubles on Monday, down from levels of around 770 roubles seen before the sanctions were announced.

After a steep decline in the shares of Russia’s largest lender Sberbank, the bank’s top managers bought shares of the lender to the amount of 45 million roubles, according to a regulatory filing.

Shares in Rusal, the world’s second-biggest aluminium producer, were down more than 4 percent on the Moscow Exchange. They have lost 34 percent of their value since Friday when the company was put on the U.S. sanctions list.

Stock indexes were mixed. The dollar-denominated RTS index was down 1.8 percent to 1,070.93 points, while the rouble-based MOEX index was up 0.87 percent at 2,192.03 points.

For Russian equities guide see <RU/EQUITY>

For Russian treasury bonds see <0#RUTSY=MM>

FILE PHOTO: A cashier of a private company, which specializes in the wholesale trade of sweets and confectionery products, uses a machine while counting 100-rouble banknotes at an office in Krasnoyarsk, Russia, January 22, 2016. REUTERS/Ilya Naymushin

Reporting by Andrey Ostroukh and Jack Stubbs; Additional reporting by Elena Fabrichnaya; Editing by Richard Balmforth and Raissa Kasolowsky

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