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Alexey Golubovich CIO, Chief Strategist, Managing Direcor

Russia May Switch into Hong Kong Dollars

Hong Kong’s monetary authority intervened in the foreign-exchange market to curb gains in the local currency as sanctions over Ukraine stoked speculation of an influx of Russian cash.

The central bank bought $925 million in Hong Kong and New York hours today, data posted on the Hong Kong Monetary Authority Bloomberg page show. That adds to the $8.39 billion it purchased in July, the most since at least October 2012, according to data compiled by Bloomberg. Russian capital outflow was about $2.5 billion in July, according to Renaissance Capital Ltd.

Mobile-phone operator OAO MegaFon moved some of its cash holdings into the Hong Kong dollar, while Norilsk Nickel, the world’s largest producer of the metal, keeps some funds in the currency, two people with knowledge of situation said last week, asking not to be identified because the information isn’t public. The U.S. and European Union stepped up sanctions on Russia’s banks and energy companies last week.

“Switching into Hong Kong dollars is becoming a more important component of capital outflows from Russia,” Oleg Kouzmin, an economist for Russia and the Commonwealth of Independent States with Renaissance Capital in Moscow, said by e-mail. “People are looking for the worst-case scenarios in further development of tensions over Ukraine.”

BNP Scare

International banks have been hit by almost $12 billion of fines since May for sanction breaches including a record $8.9 billion penalty for BNP Paribas SA. France’s largest lender admitted on June 30 to violating U.S. sanctions against Sudan, Iran and Cuba.

The downing of Malaysian Air Flight MH17 on July 17, which the U.S. says was probably caused by a missile fired by the insurgents, has helped harden attitudes against Russia. Both the rebels and Russia blame Ukrainian forces.

“The case of BNP Paribas has scared everyone so much, that some banks, whose Russian business doesn’t constitute a big part of their profits, may choose to close it altogether,” Alexei Golubovich, the managing director of Arbat Capital, which has $500 million under management, said Russian businesses may also seek havens in Singapore and Dubai.

“People with the time and money to busy themselves with such things, will start opening accounts in Singapore, Hong Kong and Dubai in advance.”

Outflows from Russia jumped to $74.6 billion in the first half, compared with $61 billion in the whole of last year, central bank data show. At $48.8 billion, outflows in the first quarter were the largest since $132.1 billion had left the country in the last three months of 2008 after the collapse of Lehman Brothers Holdings Inc. and a five-day war with Georgia.

Interventions Continue

Hong Kong’s regulator will continue its interventions to reduce the currency’s appreciation in the coming days, said Kenix Lai, a Hong Kong-based currency analyst at Bank of East Asia Ltd.

“Hong Kong is the destination for capital coming from Europe, the Middle East and Russia as investors seek higher returns in Hong Kong and in Chinese equities.”

Hong Kong’s currency was linked to the U.S. dollar in 1983 when negotiations between China and the U.K. over the city’s return to Chinese rule spurred capital outflows. It was kept at HK$7.8 per dollar until 2005, when policy makers committed to limiting declines to HK$7.85 and capping gains at HK$7.75. The Hong Kong dollar traded at HK$7.7500 today.

Driving Demand

Share listings, dividends, and mergers and acquisitions are driving demand, the HKMA said July 26. The shift in market expectations over the timing and pace of U.S. interest-rate increases may affect fund flows to emerging markets including Hong Kong, the HKMA said July 31.

Investors are keen to buy China stocks because of a planned Hong Kong-Shanghai bourse link, Bank of East Asia’s Lai said. The China Securities Regulatory Commission said in April that investors may trade 10.5 billion yuan of Hong Kong-listed stocks a day through the Shanghai exchange, and 13 billion yuan of mainland shares through Hong Kong. The city’s Hang Seng Index (HSI) of shares rallied 6.8 percent in July, the biggest monthly gain since September 2012.

sanctions, Hong Kong dollar

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