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Russian central bank admits massive Rosneft bond sale fuelled the ruble crash

Elvira Nabiullina 8

The head of Russia's central bank has admitted for the first time that the 625-billion-ruble (£6.2 billion) bond placement by state-owned oil giant Rosneft in December helped fuel the ruble's collapse. 

This follows months of speculation that the record bond sale spurred the currency crash, which Rosneft CEO Igor Sechin furiously denied.

In an interview with the Russian edition of Forbes magazine Tuesday, central bank chief Elvira Nabiullina acknowledged that the timing of the Rosneft deal may have helped spook currency markets.

She said: "I think that the Rosneft deal was opaque, it was not clear to the market and it has been an additional source of volatility in currency markets. But still not the main one."

Previously, former Russian finance minister Alexei Kudrin pointed the finger at Rosneft via Twitter for spooking currency markets, after the oil giant received what was widely seen as back-door refinancing by the Russian central bank. Rosneft hit straight back, blaming the central bank for "pushing Russia towards recession."

Compounding the impression that the state was providing Rosneft access to funding, the Bank of Russia sent out a press release shortly before the bond sale in which it announced its decision to include Rosneft bonds on the Lombard List (the list of securities eligible to be used as collateral with the central bank). Usually these releases include a number of company names that are being put onto the list, whereas this one was unusual in that it exclusively named Rosneft.

It was widely believed that the company used the funds raised in the bond sale to help pay off a $7 billion bill in debt repayments due in December.

In the same interview with Forbes, Nabiullina went on the defencive over the Central Bank of Russia's decision to shock the market with a 6.5% interest rate hike at 1 a.m. on Dec. 15.

She said: "No, it did work! Inflation would have been much higher if we had not moved to a floating exchange rate and did not raise [interest rates]. At the time the factors that were weakening the ruble were very powerful: the dramatically reduced price of oil, large payments on external debt. Of the $ 151 billion of capital outflows in 2014 a significant proportion went to payment of foreign debts. If inflation was even higher, it would have been more difficult to slow the pace of outflows."

The central bank chief admitted that one of the most pressing problems now is a collateral shortage in the Russian banking system that they are able to use to get access to ruble funding from the CBR. Her solution? To include more Russian companies on the so-called Lombard List, the central banks list of bonds that it accepts in exchange for rubles.

The downside is that the wider that list needs to be, the more risk the central bank is likely to have to put into its balance sheet in order to fund the country's struggling banks.

As she said: "Now banks have a shortage of collateral, and we have to provide them with more liquidity for non-marketable assets."

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