Russian President Vladimir Putin’s policy makers are in damage-control mode to confront mounting economic pain from U.S. and European sanctions over Ukraine.

The central bank said today it sold $420 million of foreign currency on Oct. 6 in its third day of interventions this month to slow a decline in the ruble that’s made it the world’s worst performer since June. The government raised less than half the amount offered in a bond sale, while people with knowledge of the matter said OAO Lukoil is seeking a dollar loan to bypass the sanctions. All this while oil, the source of half of Russia’s revenue with natural gas, dropped to a 27-month low.

“The ruble is in the middle of a perfect storm,” Vladimir Osakovskiy, the chief economist for Russia and the Commonwealth of Independent States at Bank of America Merrill Lynch, said by phone from Moscow. “The spike in political risk, the impact of sanctions as well as seasonality and the steep drop in oil prices came all at once.”

Currency sales, set to top $2 billion once interventions in the past two days are factored in, underscore the price Putin is paying for his country’s annexation of Crimea and alleged support for rebels in eastern Ukraine. The U.S. and European Union have imposed penalties that curbed access of Russian companies to overseas financing and fueled an exodus of foreign capital just as a drop in the price of crude saps export revenue.

Under Pressure

The Bank of Russia is dipping into $456.8 billion of reserves to prop up the ruble, which slid past 40 per dollar today. The monetary authority has spent more than $1.4 billion defending the currency this month, according to central bank data that exclude figures for yesterday and today.

The interventions come as shelling killed six people and wounded more in Ukraine’s eastern regions, marring the government’s attempt to halt firing and open the way for a buffer zone agreed in a truce deal with rebels last month.

Waging Financial War

The currency’s drop below 40 per dollar “is an important psychological threshold for the Russians, so the central bank is forced to intervene at this level,” Anvar Gilyazitdinov, who manages $10 million at Rye, Man & Gor in Moscow, said by phone.

The bank steps into the currency market each time the ruble crosses the upper limit of its trading band, which has happened every day this week. It shifted that boundary by 5 kopeks to 44.65 versus its dollar-euro basket yesterday, and since then the currency fell to 44.8521 by 6 p.m. in Moscow, when the central bank stops market operations.

The ruble slipped 0.5 percent against the dollar to 40.1472 at 2.41 p.m. in New York. It was at 44.9544 against the currency basket after hitting 45.0182 earlier.

According to official guidelines, the authority sells $350 million when the ruble crosses the upper boundary before shifting it by 5 kopeks.

Debt Appetite

Brent dropped as much as 1.5 percent to $90.76 per barrel in London today, down from this year’s peak of $115 a barrel in June. That’s curtailing Russia’s export earnings, while the nation’s foreign reserves have fallen for six straight weeks to the lowest level since 2010.

The ruble’s slide is exacerbating Russia’s struggle with inflation, which soared to a three-year high of 8 percent last month even as the economy teeters near recession.

Appetite for ruble debt, meanwhile, is dwindling, with the government selling 4.5 billion rubles ($112 million) of bonds due in August 2023 today as yields climbed 26 basis points from a sale two weeks ago. It offered 10 billion rubles.

Cash Crunch

Companies are scrambling for dollars and euros as they contend with $54.7 billion of debt repayments in the next three months, according to central bank estimates. Lukoil has asked lenders for a pre-export finance facility denominated in dollars, according to three people with knowledge of the matter.

Corporate borrowers will need to find at least $90 billion domestically by the end of 2015 to refinance debt, Economy Minister Alexei Ulyukayev told lawmakers in Moscow today.

The central bank announced a plan last week to offer foreign-currency repurchase agreements within “several weeks” to help ease the crunch that has sent the premium traders are willing to pay to swap rubles into dollars to a record.

Russia, which spent $40 billion defending the ruble this year excluding this month’s interventions, will probably need to sell another $30 billion by year-end, according to Uralsib Capital estimates.

Repos could have alleviated the cash shortage, according to Konstantin Artemov, a money manager at Raiffeisen Capital in Moscow. “Instead of selling lots of dollars, you could’ve just lent some, with the same effect,” he said.

(Source: Bloomberg)