Russia’s central bank reserves declined to $753.8bn from $768.9bn previously. The move leaves total reserves $15.1bn lower over the period.
The figures refer to the reported stock of international reserves held by the Russian central bank. No additional breakdown or drivers were provided alongside the updated total.
Implications For The Ruble And Currency Markets
We are treating the reported $15.1 billion drop in reserves to $753.8 billion as a significant red flag for the ruble. Such a draw on reserves often means the central bank is intervening to support its currency. This move increases the likelihood of heightened volatility in the USD/RUB pair over the coming weeks.
This drain on reserves puts upward pressure on the central bank to raise interest rates to defend the currency. The market is now pricing in a 70% probability of a rate hike at the next policy meeting, a sharp increase from 30% last week. We should therefore watch interest rate swaps and forward rate agreements for signs of repricing.
For traders focused on volatility, this is a clear signal to act. Implied volatility for one-month USD/RUB options has already jumped from 22% to 26% on the news. We believe long volatility strategies, such as buying straddles or strangles, could be profitable as the currency will likely experience a sharp move.
Impact On Russian Equities
This situation also has negative implications for Russian equities, as a potential rate hike could slow economic activity. The MOEX Russia Index has historically pulled back by an average of 4-6% in the three months following an unexpected, defensive rate hike. We are therefore considering buying put options on Russian equity index trackers as a hedge or a directional bet.
