Russia Dirty Float Outed by Traders as Central Bank Sells Rubles

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For all Russia’s talk of a free-floating exchange rate, central bank actions are telling traders it’s still being managed.

While the Bank of Russia said its purchases of dollars last week were aimed at replenishing foreign-currency reserves, Goldman Sachs Group Inc. and Morgan Stanley see curtailing the world’s biggest currency rally as the real motive. Options show traders pared the probability of the ruble strengthening beyond 49 per dollar to 41 percent from 44 percent by the end of June after the central bank began buying dollars Wednesday.

“This move from Russia’s central bank effectively indicates the ruble has returned to the dirty-float regime,” Yury Tulinov, the Moscow-based head of research at PAO Rosbank, Societe Generale SA’s Russian unit, said by e-mail on Friday. “The central bank’s real aim behind this move was to prevent the ruble strengthening beyond its fair value.”

The perceived currency intervention shows how oil’s recovery and improved stability in Ukraine are boosting investor confidence in Russia to a point where the ruble’s strength threatens competitiveness. After spending almost $90 billion last year to stem the ruble’s worst depreciation since the 1998 debt crisis, Russia announced in November it would allow the currency to trade freely to conserve reserves.

Currency ‘Opportunity’

Even as the ruble’s world-beating rally this year slows inflation, helping the central bank cut rates, it’s also chipping away at revenue earned from crude and other exports in a year when Russia faces its widest budget deficit since 2010. Officials, including the Finance Minister, have suggested the appreciation is turning into an impediment.

The Bank of Russia denied that buying foreign currency runs counter to a freefloat. Central banks of countries claiming a fully flexible exchange rate often conduct such operations, it said through its press service on May 14.

It’s a good time to buy the greenback as it trades near four-month lows against a basket of 10 currencies. The slump in reserves was among reasons cited by Moody’s Investors Service and Standard & Poor’s for their decisions to push the sovereign’s credit rating to junk this year.

“Rating agencies constantly rub it in our face that reserves declined,” Olga Lapshina, an analyst at Bank Saint Petersburg, said by phone on May 14. “Now we have an opportunity, why not take advantage of it?”

‘Step Back’

The ruble climbed 0.8 percent versus the dollar by 6:30 p.m. on Monday after a 1.7 percent drop on Thursday when the regulator announced it would buy $100 million to $200 million a day. The central bank, which reports interventions with a lag of two days, purchased $181 million on May 13 in its first such operation under the plan.

The move underscores policy makers’ concern over the ruble’s 23 percent rally this year and marks a “step back” from a “pure” float, Morgan Stanley analysts wrote in a May 15 note. According to Goldman analysts, the announcement was a “surprise” and shows the central bank regards the gains as “excessive.”

The ruble lost almost half its value last year even as Russia burned through reserves to slow the collapse. In November, the Bank of Russia abandoned its managed-currency policy in part to preserve the cash pile, which slid to $351 billion in April, the least since April 2007.

The cumulative effect of the currency purchases will act as a headwind to further ruble strength, even with oil near a five-month high, according to Vladimir Osakovskiy, the chief economist for Russia at Bank of America Corp. in Moscow. Osakovskiy sees the ruble weakening 10 percent to 55 against the dollar by the end of the year.

“It’s yet another sign that the Bank of Russia doesn’t like the ruble below 50 per dollar and is intent to use all tools available to prevent it,” Osakovskiy said by e-mail Friday.

For more, read this QuickTake: Currency Pegs

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