zlacker

at 17% the interest rate paid by the RUB shorts amounts to 0.046% per day, whereas just today trough to peak USDRUB moved 35%. In this environment unless you "do a Sweden/Slovakia" and ramp rates to 1000% by preventing offshore banks from funding onshore (a form of capital controls), a measly 600bps hike is meaningless.

>>vegabo+(OP)
Spot on. They now have two options

1) Increase the rate to something truly insane like 1000%

2) Introduce currency controls and force everyone to use Ruble

Neither of these options are good, but #2 seems much more likely.

>>vegabo+(OP)
USBRUB moving 3500bps today tells us volatility is high. It does not indicate that we can expect an average move of 460 bps per day going forward. Carry trades perform horribly amidst increasing or ambiguous volatility. Their leveraged structures make sharp adverse swings game overs.

>>vegabo+(OP)
At least it moved the situation from a no-brainer to "let's do the math before we short ruble".

I don't know if it's going to be effective at all, just trying to find the most charitable explanation for CB.ru actions.

>>imagin+v
Back in the Soviet days, it was illegal to take Rubles out of the country. It wouldn't surprise me to see that law reinstated.

>>JumpCr+H
sure - but we're talking RUB specs who are in it for a 5 day move. Nobody is expecting annualized vol of 566% (35% * sqrt(262)). RUB has been moving several chunky percentages daily for 2 weeks at least, and is down 50% against the dollar 3 months. 17% annualized doesn't make an iota of difference in that kind of market.

Where it does make a difference is that long end bonds (OFZ 28s) are now yielding 15%. That's 15% for 13 years ;) Chunky yield in the long end. That will tempt the long term investors in (IF big if, they don't impose controls). Care to catch the falling knife?

>>vegabo+B1
Can you elaborate on the impact of capital controls? Are bond investors not able to trade out of their positions?

>>chiph+t1
Yeah, but back then they had two generations that never saw any dollars or iPhones or anything luxurious.

It will be a bit more complicated this time.

They might not have any other option though.

>>foobar+S4
The imposition of capital controls signals a country that is willing to trap money within its borders. That very fact is scary, and scary requires compensation. While that usually does not apply to what are classed as "long term" investors (direct purchasing of real assets in the country, purchasing of equities or bonds usually for a minimum time period, but NOT derivatives), it still requires an additional risk premium such that bonds will then need to be cheaper still (yield more) to compensate.

The more relevant short term argument that I am referring to, is that if they were to "squeeze" the offshore market by disallowing or limiting the lending of RUB by local banks to offshore banks, then they could easily engineer a massive squeeze on the rouble offshore. That is all those people who are short RUB would suddenly find that "rolling" those positions (that is, borrowing RUB so you can sell it), suddenly costs a fortune. This is even true in FX forwards because ultimately these are a derivative of interest rates. If it costs you a fortune to "fund" the RUB, then the converse is that it pays you a fortune to lend RUB to the market. If it pays you handsomely simply to lend short-term RUB to the market, there is no reason to buy long term bonds, whose price must "compete" with the front end of the yield curve. In short: high short end rates will deter purchasing of any instrument with a (significantly) lower yield in the long end of the yield curve. If we were to get the above mentioned RUB squeeze to anything like 100% or higher, imagine how silly it would be to buy a long end bond at 15% (even though yes yes, long term it might still be a good investment - but that would require a long discussion about the implied path of future rates. Humans have proven themselves to be very short termist in markets and thus it is likely that long term bond prices would fall, dramatically in that scenario).

So to answer your question directly, bond investors still would be able to trade out of their positions (though in a disorderly market even that cannot be taken for granted), but at a very low price.

>>vegabo+27
Thanks, super informative. I appreciate it.