Russia's central bank raised interest rates by 350 basis points to 12 per cent on Tuesday in an emergency move to try to halt the rouble's recent slide.
On Monday, the currency plunged to a 16-month low, sinking as low as 101 to the dollar, as the war in Ukraine continues to affect Russia's economy.
Data from the Moscow Exchange showed the rouble sharply weakening against the dollar after the rate decision, before settling to trade at around 98.19 just after 1pm local time (2pm Gulf Standard Time).
Since the beginning of the year, the rouble has shed about 26 per cent of its value against the dollar and is now roughly equal to one US cent.
What's behind the rouble's slide?
Russia's economy is struggling with the costs of the war in Ukraine and reduced revenue from oil and gas.
In addition, imports have surged in recent months, creating demand for the dollar and other major currencies, further weakening the rouble.
Timothy Ash, senior strategist at Bluebay Asset Management, said the currency's slide is driven by sanctions and capital flight as Russians look to move their money out of the country.
“In recent months, what we've seen is an oil price cap beginning to work, the erosion of Russia's reserves and generally, sanctions,” he told The National.
“You can import stuff you want, but getting around sanctions costs extra money. So that's all reflected in a current account and trade position that deteriorates and more demand for dollars.”
He added that remittance data showed that wealthier Russians were apparently finding ways to get around sanctions and capital controls.
“Russians have been getting their money out, and that's continued, and headlines about a currency weakness leads to more capital flight,” he explained.
Interest rates likely to rise further
President Vladimir Putin's economic adviser Maxim Oreshkin rebuked the central bank on Monday, blaming what he called its soft monetary policy for weakening the rouble.
Hours after Mr Oreshkin's words, the bank announced the emergency meeting, throwing the currency a lifeline.
“Inflationary pressure is building up,” the bank said in a statement on Tuesday as they said the rate would move from 8.5 per cent to 12 percent.
“The pass-through of the rouble's depreciation to prices is gaining momentum and inflation expectations are on the rise.”
The bank last made an emergency rate hike in late February 2022 with a rate raise to 20 per cent in the immediate fallout of Russia's despatching troops to Ukraine.
The bank then steadily lowered the cost of borrowing to 7.5 per cent as strong inflation pressure eased in the second half of 2022.
The bank is next scheduled to consider its key rate on September 15.
What's next?
The rouble could sink further to 115 to 120 per dollar, Alor Broker analyst Alexei Antonov warned in a note published earlier by financial firms on Monday,
“For the decline in the rouble to end,” Mr Antonov said, “we need to wait for a reduction in imports or decisive steps by the monetary authorities.”
Mr Ash said that as long as the war continues things will get “worse for Russia, the Russian economy and the rouble.”
“Hiking policy rates won’t solve anything – they might temporarily slow the pace of depreciation of the rouble at the price of slower real GDP growth – unless the core problem, the war and sanctions are resolved.”
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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