The choice of factors influencing the growth of arbitrage profit in dollar/ruble forward transactions was made taking into account the logic of the current events in 2014. Before proceeding to describe the factors, it is worth paying attention to the background of this period. In 2014, the Russian interbank market was rather heavily influenced by several factors. These include a sharp drop in oil prices to record lows, geopolitical tension, sanctions against Russia by European countries, the United States and a number of other countries, retaliatory sanctions by Russia, the decision of the Bank of Russia to switch to a floating ruble exchange rate, refusal to intervene in the domestic foreign exchange market, and an emergency increase in the key rate.
In particular, Brent prices, which are strongly correlated with the ruble exchange rate, fell by more than 50% in 2014. In 2015, the decline in oil prices continued and the Brent barrel fell in price by another 35%. At the beginning of 2016, the price of this oil fell by another 25%, dropping below $30 per barrel. At the same time, both at the end of 2014 - beginning of 2015 and the turn of 2015-2016, oil prices were breaking historical lows, causing a surge in ruble volatility. Besides, in conditions of the collapse of oil prices, the ruble fell sharply in price. In 2014 alone, the dollar exchange rate increased by 140% against the ruble, and in 2015 it increased by another 20%.
Geopolitical tensions increased the effect of pressure on the ruble. In particular, on March 1, the Federation Council Committees on Defense and International Affairs unanimously approved the request of the President and Commander-in-Chief of the Russian Federation Vladimir Putin to introduce troops into the territory of Ukraine. Even though after this decision of the Federation Council Russia did not exceed the number of servicemen at the Russian base in Crimea approved by the agreement with Ukraine, the rouble still reacted to this decision on March 1 by increasing volatility. In particular, the historical volatility of the 3-month options of the dollar/ruble pair on Monday, 3 March soared from 8.56 percent to 9.88 percent, which was the largest jump in this indicator since August 2011. The dollar/ruble exchange rate rose by 2.92% to Br36.9.
This was followed by sanctions from the U.S. and the EU, as well as Canada, Switzerland, Japan, and Australia. In particular, in July and September 2014, the United States imposed sanctions on Russian banks. In particular, VTB, Sberbank, Rosselkhozbank, Gazprombank, Vnesheconombank and the Bank of Moscow were subject to restrictions on loans exceeding 30 days. Besides, in September, the EU restricted access to loans from European banks VTB, Gazprombank, Vnesheconombank, Sberbank, and Rosselkhozbank.
However, the key factor in influencing the Russian currency, which set a new time limit in the ruble, was the decision of the Bank of Russia on 10 November 201 to abandon the previous mechanism of exchange rate policy. In particular, the operational range of allowed values of the dual-currency basket was abolished, as well as regular interventions at the boundaries of the established range and beyond. The ruble reacted to this decision with a sharp decline. Thus, from November 10 to December 16, 2014, the dollar/ruble exchange rate increased by 49%. Then, on December 16, the Central Bank of the Russian Federation urgently raised the key rate by 6.5 p.p. to 17% per annum, which was the sharpest increase in the rate since May 1998.
International rating agencies added even more pressure on the ruble market by downgrading the Russian Federation's rating to non-investment level at the beginning of 2015. In particular, on January 26, 2015, S&P downgraded the rating of the Russian Federation to the speculative level of "BB+", while Moody's downgraded it to "Ba1" on February 21.
The crisis in the Russian money market reached its peak at the end of 2014 against the background of the events described earlier. At the same time, according to the data of the Central Bank of the Russian Federation, in the 3rd quarter of 2014, the Russian interbank market was characterized by increased demand for foreign currency from banks. After the introduction of sectoral sanctions, it became more difficult for Russian banks to attract foreign currency funds abroad, so the supply of foreign currency liquidity in the banking sector decreased. This made it more expensive to attract foreign currency in the interbank lending market. Also, a sharp increase in the ruble volatility in the 4th quarter, as well as insufficient collateral for some market participants and an increase in rates - all this led to a decrease in the volume of open positions at the end of the quarter from RUB 2.7 trillion to RUB 2.4 trillion.