Russia Central Bank Curbs Spur Ruble’s Worst Stretch This Year

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Central Bank Governor Elvira Nabiullina
The curbs indicate central bank Governor Elvira Nabiullina is trying to slow down the rally that drove the ruble into what some technical analysts deemed overbought territory. Photographer: Andrey Rudakov/Bloomberg

The ruble headed for its longest stretch of losses this year as the Russian central bank curbed the supply of cheap dollars to banks after the funds were used to take advantage of the world’s best carry trade.

The currency lost 0.6 percent to 53.6680 per dollar by 4:05 p.m. in Moscow, taking the four-day retreat to 8 percent. Declines accelerated on Monday after the Bank of Russia raised the rate it charges banks for foreign currency at repurchase-agreement auctions for the third time in less than a month, narrowing the potential gains of reinvesting the cash in government debt.

Russian banks have used the repo mechanism for months to gain access to cheaper funds that in some cases they have placed in higher-yielding assets, a key trigger for a sovereign bond rally that handed investors 33 percent returns since Jan. 1. The curbs indicate central bank Governor Elvira Nabiullina is trying to slow down the rally that drove the ruble into what some technical analysts deemed overbought territory.

“The ruble has recovered nicely from the massive selloff during the winter, but this recovery has already taken it into an overshooting territory,” Vladimir Osakovskiy, the chief economist for Russia at Bank of America Corp. in Moscow, said in e-mailed comments. “The central bank’s moves are a very good trigger for a correction.”

The government-bond market is already feeling the effects, with the yield on the five-year bond rising for the third day to reach 11.43 percent. The Finance Ministry plans to offer 25 billion rubles ($465 million) of bonds at auctions on Wednesday compared with 30 billion rubles last week.

‘Active Steps’

While the stronger ruble -- up 12 percent this year -- is damping consumer-price pressures after inflation climbed to a 13-year high, it also potentially curtails state revenue at a time when the economy is facing its worst slowdown since 2009. Brent crude, used to price Russia’s main export blend, has gained almost 10 percent this year. The dollar-denominated RTS Index of equities rose 0.3 percent.

The ruble’s drop this week has brought the Brent price in local-currency terms to 3,405 per barrel on Tuesday, up from 2,934 on April 9, the lowest since 2011.

The Bank of Russia said on Monday it will increase its rate on 12-month foreign-currency repos by 75 basis points to 250 basis points above the London interbank overnight rate. Minimum rates on one-week and four-week repos were increased to 200 basis points over Libor.

Some investors may regard this decision as a signal that the Bank of Russia will adopt “more active” steps to stem ruble gains, according to Oleg Kouzmin, an economist at Renaissance Capital in Moscow. He cited, for instance, a drastic interest-rate decrease at the April 30 policy meeting, although Kouzmin said he doesn’t share these concerns.

Biggest Returns

The measures come after borrowing in dollars to fund purchases for ruble debt earned 19 percent this year, exceeding the second-best currency, the Swiss franc, by almost six times, according to data compiled by Bloomberg.

The repo facility was first introduced in October to make $50 billion available to lenders over the course of the program to help them meet external debt obligations as U.S.-led sanctions over the conflict in Ukraine blocked their access to foreign capital markets. As companies overcame the biggest monthly repayment hurdles for the year, lenders channeled some of the money into higher-yielding ruble assets instead.

The central bank is “just trying to bring the ruble back to a more steady state, which we think is around 55-60” against the dollar, BofA’s Osakovskiy said. The currency strengthened to a 2015 high of 49.42 on April 16.

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