Azernews.Az

By Bloomberg

If China’s devaluation is going to set off a currency war, Russia will be pretty hard to beat.

The yuan’s 1.8 percent plunge on Tuesday was topped by the 2.4 percent slide in the ruble, the largest of any major currency. Even before China’s announcement on Tuesday, most international futures traders were betting on further declines for the ruble, this quarter’s worst-performing major currency with a drop of 15 percent.

Developments in China, Russia’s biggest trading partner, are exacerbating a slide in the ruble that’s been spurred by oil’s slump below $50 a barrel, renewed tensions in eastern Ukraine and the prospect of higher U.S. interest rates. The ruble’s vulnerability reflects Russia’s increased dependency on China amid worsening relations with the U.S. and Europe, which imposed sanctions on the country last year.

“I don’t think China will stop even at a 5 percent devaluation, and then the ruble will suffer” further, said Konstantin Artemov, a money manager at Raiffeisen Capital in Moscow, who has reduced the duration of bonds in his portfolio to less than a year across the 18.5 billion rubles ($290 million) he oversees.

China’s move deepened the plunge in oil, which fell 2.4 percent to $49.18 per barrel in London trading on Tuesday. Oil, Russia’s main export earner, has dropped more than 25 percent from this year’s peak closing price on concern the global surplus that sent crude into a bear market will persist. The ruble fell 1.1 percent against the dollar as of 11:38 a.m. in Moscow on Wednesday.

Knee-Jerk Reaction

Hedge funds and other large speculators had more bets selling than buying the ruble, or net shorts, for a fourth week through Aug. 4, U.S. Commodity Futures Trading Commission data showed. Benchmark government ruble bonds due in February 2027 fell, lifting the yield to the highest in more than two weeks at 10.99 percent.

While traders’ knee-jerk reaction was to sell the ruble, the yuan devaluation could end up helping Russia’s currency if it spurs an uptick in Chinese growth and increased demand for commodities, according to Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow.

“This is a Chinese form of quantitative easing,” Losev said in e-mailed comments, referring to the policy of monetary stimulus in the U.S. “This is more a boon for commodity markets, as it can sooth the rising economic problems in China.”

Russian government officials have called for China to take a larger share of exports. A contract to meet 11 percent of China’s piped gas demand is set to make the country the biggest customer of Gazprom PJSC, Russian largest company, by 2030.

“Russia is in the midst of trying to reduce its dependency on the EU and move more to China for export revenues,” Simon Quijano-Evans, the head of emerging-market research at Commerzbank AG in London, said in a research note, recommending a “cautious position” on the ruble.