Ruble Rallies Defying Russia Measures as Recession Risk Eases

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The ruble gained toward a six-month high, defying central bank measures to stem the world’s biggest currency rally, amid signs Russia’s recession isn’t as deep as predicted.

The Bank of Russia, which last week started buying foreign currency for the first time since adopting a free float in November, on Monday canceled an auction of repurchase agreements in dollars. The steps failed to stop the ruble’s best start to a year in more than two decades, with the currency adding 1 percent to 49.0870 per dollar by 4:53 p.m. in Moscow.

Policy makers pulled the offering of one-year repos, while keeping seven-day and 28-day maturities, as part of a wider effort since March to curb banks’ access to cheaper dollars that were in some cases being used to speculate on further ruble gains. Data on Friday showed gross domestic product shrank by a less-than-expected 1.9 percent in the first quarter.

“The closure of the 12-month repo is a logical move to withdraw any remaining support to the ruble in the conditions of its continued appreciation,” Vladimir Osakovskiy, the chief economist for Russia at Bank of America Corp. in Moscow, said by e-mail. Maintaining short-term repos is supporting the currency, he said.

The ruble has advanced 23 percent in 2015, compared with a 16 percent increase in crude oil, the country’s main export earner. While the stronger currency has helped damp inflationary pressures it’s also reducing the government’s export earnings as the budget deficit widens.

Less Pressure

The stronger GDP results prompted Deutsche Bank AG to trim its predictions for a full-year contraction to 3.2 percent 5.2 percent. “Given the macroeconomic developments so far this year, we expect less pressure from the external sector in the form of capital outflows,” Deutsche Bank analysts, led by Yaroslav Lissovolik in Moscow, wrote in a note to clients today.

Five-year government bonds climbed for a second day, reducing the yield by 12 basis points to 10.77 percent, the lowest in more than a week. The Micex Index of equities lost 0.2 percent, trimming its 2015 gain to 21 percent.

The currency’s recovery from a 46 percent slide last year has given policy makers room to cut interest rates three times in 2015 by a total of 450 basis points to 12.5 percent. Carry traders, who borrow in currencies of countries with lower interest rates to invest in higher-yielding assets, took home returns of 31 percent on the ruble this year, about four times more than the second-best performer, the Swiss franc.

Carry Trade

Some Russian banks were borrowing dollars via the repo facility and reinvesting them in Russian Eurobonds. The repos were introduced in October to help companies pay their foreign debts as sanctions over the conflict in Ukraine locked them out of overseas capital markets.

To damp the appeal of the carry trade, the central bank has increased the charge and reduced cash provided via its repo facility to about $34.6 billion on Monday from a mid-April peak of $39.4 billion. Policy makers also started buying $100 million to $200 million daily last week to build reserves.

“So far, the Bank of Russia has failed to turn this trend around” in the ruble, Irina Lebedeva, an economist at UralSib Capital in Moscow, said in a research note. “The central bank may increase the purchases of FX for replenishing reserves and continue to lower the key rate.”

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