China-Russia Alliance Emerges on Ruble Swap

With a plunging currency and liquidity fears, Russia has turned to China for help in staving off a protracted economic decline, and Chinese lawmakers are receptive to their needs.

Chinese officials announced Tuesday that they would enlarge a currency swap program with Russia, which is already $24 billion. The news helped the ruble rise 4.9%, although it has since fallen 0.53% to 54.70. 

The U.S. dollar strengthened relative to emerging market currencies, and is now up approximately 2% over the past month against most foreign currencies.

With a plunging currency and liquidity fears, Russia has turned to China for help in staving off a protracted economic decline, and Chinese lawmakers are receptive to their needs.

Chinese officials announced Tuesday that they would enlarge a currency swap program with Russia, which is already $24 billion. The news helped the ruble rise 4.9%, although it has since fallen 0.53% to 54.70. 

The U.S. dollar strengthened relative to emerging market currencies, and is now up approximately 2% over the past month against most foreign currencies.

Phoenix TV, a private media company in Hong Kong, publicized the ruble’s recovery after announcing that China’s Commerce Minister will expand the currency swap between the two countries.  This would create a floor for the currency after many looked to redeem rubles for U.S. dollars or hard assets. 

Sales of real estate, cars, and expensive appliances have boomed in upper middle class and wealthy pockets of Russia, as capital holders look to shed the ruble before it falls further. Expatriates working in the country are fleeing the country after seeing their incomes fall by as much as 30% relative to their native currencies.

China has expanded its bilateral currency agreements with many emerging economics, and it has increased its swap exchanges as oil prices fall. The country purchased $2.3 billion of Argentine currency since October, while lending $4 billion to Venezuela, whose high cost of oil production has made it especially vulnerable to falling oil prices.

While foreign investments are almost certain to lose money in the short term, they are helping China to consolidate power and influence with emerging markets. With its currency swaps, China has become a de facto lender of last resort for troubled emerging market economies, a role traditionally held by the International Monetary Fund. No oil exporter has turned to the IMF for a large bailout in 2014, despite the fall in revenue. 

Debt Rating Cut Rumors

Russian investors are facing greater headwinds after rumors surfaced late Tuesday that Standard and Poor’s, a credit rating agency, would cut Russia’s credit rating to junk, which would cause borrowing costs to rise again for the ailing oil exporting nation. However, the nation’s ability to raise capital through bond auctions has been pressured. Russia recently saw falling demand for bonds, cancelling five weekly bond auctions in November, and foreign demand for bonds remains anemic.

Many Russian banks have come near bankruptcy on falling liquidity after bank runs and currency conversions caused their capital reserves to decline drastically. On Tuesday, Russian lawmakers passed a law allowing the government’s Deposit Insurance Agency to purchase equity in the failing banks, thereby recapitalizing them and saving them from bankruptcy. The move is a reminder of when the Soviet government had total control over the nation’s monetary system.  This has met with little political resistance, as Putin’s approval ratings remain high.

S&P continues its evaluation of Russia’s credit rating, which is currently BBB-.