- President’s comments directed at government, policy maker says
- Central bank says it stands by free float, won’t weaken ruble
Russia’s central bank is under no pressure from Vladimir Putin to relinquish the ruble’s free float, with policy makers seeing the president’s exasperation over the currency’s strength as a message for the government, a senior official said.
Government policy was the object of Putin’s remarks on Tuesday that sent the ruble to its biggest tumble in almost a month, according to the central banker, who spoke on condition of anonymity, citing the sensitivity of the issue. The president hasn’t instructed the central bank to weaken the exchange rate, the official said.
The ruble is moving to the forefront of policy efforts more than two years after the central bank allowed it to trade freely as the economy lurched into the biggest currency crisis since 1998. On Thursday, the Bank of Russia said it’s committed to a free float and won’t influence the exchange rate after a Kremlin economic aide said its appreciation may have gone too far.
“If the central bank tries now to push the ruble weaker, that would increase money supply, raise inflation pressure and in fact amount to an about-face in the entire policy,” said Vladimir Tikhomirov, chief economist at BCS Financial Group, a Moscow brokerage. “That’s why I doubt that the central bank will move in this direction.”
Putin spooked currency traders on Tuesday when he told Prime Minister Dmitry Medvedev to monitor the ruble’s movement while the price of crude, Russia’s main export earner, remains volatile. Echoing that warning, Andrey Belousov, the aide to Putin, said the currency’s strength relative to oil prices endangers the budget and the competitiveness of local companies.
Russia’s currency has started to “over-appreciate” and is working against the country’s exports, Belousov said. The central bank takes a different view, according to the official at the Bank of Russia.
“The central bank doesn’t plan to drop its floating rate and has no plans to influence the ruble rate,” its press service said in a statement.
The ruble erased an advance at the start of trading on Thursday after the flurry of statements from officials and the central bank pointed to a disagreement in the government over what’s best for the economy.
The Russian currency headed for its biggest weekly decline in two months following the discussions. It depreciated 0.6 percent to 64.7575 against the dollar at 5 p.m. in Moscow. Brent was 0.8 percent weaker at $45.83 a barrel.
“There is some division between those who are quite convinced and trying to convince the president that the currency is overvalued and that this is bad for the economy, and those who are unsure about the net benefit of having weaker FX,” said Dmitri Petrov, an analyst at Nomura International Plc in London.
Belousov, a former economy minister who replaced Elvira Nabiullina as Putin’s aide after she took charge of the central bank in 2013, was among the first officials to publicly broach the possibility of a rate cut in January 2015 after an emergency increase in the previous month. Days later, the Bank of Russia shocked traders and analysts alike with a decrease that was among the most abrupt policy reversals by major central banks since 1990.
The debate around the ruble intensified after it shrugged off a decline of more than 7 percent in Brent oil this month, losing only 1.2 percent in the same period. The mismatch is bad news for Russia’s budget because it reduces the amount of rubles the government receives per barrel of oil sold abroad at a time when the deficit is running at its widest in more than half a decade.
The 60-day correlation between the ruble and oil has dropped to an almost one-year low, as tax and dividend payments outweigh crude’s decline in June. At current oil prices, the budget needs the ruble to trade no stronger than 65 to 70 versus the dollar, the Vedomosti newspaper reported Thursday, citing unidentified government officials.
The average price of Brent in rubles over the past 12 months has fallen by 13 percent to 3,211. Russia’s budget for this year is based on its Urals crude at 3,165 rubles. The export blend usually trades at a discount to Brent.
Policy makers will meet next week to review borrowing costs after decreasing their their key interest rate last month for the first time in almost a year. While most economists surveyed by Bloomberg forecast no change in the benchmark from 10.5 percent, derivatives traders’ wagers for a cut in the next three months are near a six-week high, with forward-rate agreements signaling 59 basis points of reductions on Thursday.
Although the central bank has indicated that no monetary-policy action is imminent, the fact that Putin sparked the debate could increase the possibility of a rate reduction at the next rate meeting, according to Union Bancaire Privee.
“Putin’s comments may, at the margin, increase the chance of a cut,” said Koon Chow, a London-based strategist at Union Bancaire, which oversees $112 billion in assets. “The central bank can successfully undermine the attractiveness of the ruble by cutting interest rates and intervening to buy dollars, to replenish the foreign-currency reserves.”