Currency War Objector Resumes Ruble Intervention: Russia Credit

Even as Russian officials sound the alarm on a renewed “currency war,” the nation’s central bank is stepping up sales of the ruble to curb its gains with the biggest interventions this month since May.

The central bank bought about 15.3 billion rubles ($503 million) of foreign currency from Jan. 8 to Jan. 16, according to data on its website. Three-month historic volatility on the ruble fell to 7.54 percent on Jan. 17 from 9.37 percent at the beginning of November, while the same gauge for the Brazilian real rose to 8.07 percent from 5 percent during the same period, data compiled by Bloomberg show.

Bank Rossii First Deputy Chairman Alexey Ulyukayev said on Jan. 16 that Japan’s decision to pursue a weaker currency may lead to reciprocal actions that would hurt the global economy as nations seek to protect their export industries. The drop in volatility stemming from Russia’s interventions will benefit the domestic debt market, according to VTB Capital.

“This is positive for the local debt market because the ruble interventions support liquidity in the ruble banking system,” Anton Nikitin, a VTB analyst in Moscow, said by phone. “Lower ruble volatility makes the return on ruble bonds more predictable.”

While Bank Rossii didn’t buy or sell dollars or euros in December for the first month since at least August 2008, Taiwan’s central bank has intervened to weaken its dollar on most days in the past nine months and policy makers in the Czech Republic are considering intervention to curb koruna gains.

Weaker Currencies

Japanese Prime Minister Shinzo Abe said he’s seeking “bold” monetary easing to end deflation, while the U.S. Federal Reserve expanded its monthly asset purchases from Jan. 1, boosting the supply of the dollar. The push for weaker currencies is being driven by a need to find new stimulus for economic growth after monetary easing pushed interest rates to near zero and fiscal policies give way to austerity.

Russia’s currency strengthened 2.2 percent against the dollar since the end of November, while the euro has weakened 3 percent versus the greenback in the same time period, data compiled by Bloomberg show.

Russia acted last year to smooth “sharp exchange-rate fluctuations” and plans to allow the ruble to free float by 2015, according to the central bank’s website. Bank Rossii in July widened the corridor in which it allows the currency to fluctuate to between 31.65 and 38.65 rubles against its dollar-euro target basket. That compares with a rate of 34.8405 by 7 p.m. in Moscow yesterday, which is when the central bank ceases operations on the currency market. Russia extended trading hours for the ruble until 11:50 p.m. this year.

Basket Cost

“Over the last few months the cost of the basket remained in the same scope, that’s why the central bank didn’t intervene,” Igor Akinshin, a currency trader at Alfa Bank in Moscow, said by phone. “Once the basket crosses this narrow corridor, interventions intensify.”

The central bank’s press service in Moscow didn’t respond to a faxed request for comment.

Developing countries have repeatedly complained about strong currencies as a result of monetary easing in the U.S., Europe and Japan, leading Brazilian Finance Minister Guido Mantega to use the term “currency war” in 2010.

’Mild’ Devaluations

The current round of global devaluations are “mild” as economies have managed to adjust to rounds of quantitative easing implemented by major central banks, Vladimir Pantyushin, chief economist at Barclays Plc’s investment-banking unit in Moscow, said by e-mail Jan. 16.

“In the context of continuing weakness of the global economy I am more concerned about the exit part of the quantitative easing exercises, i.e. how much negative impact we will see when major central bank begin to reduce their balance sheets,” Pantyushin said by e-mail.

The ruble fell 0.2 percent to 30.2650 per dollar by 7:21 p.m. in Moscow. Non-deliverable forwards, which provide a guide to expectations of currency movements, showed the ruble at 30.7045 per dollar in three months.

Russia is rated BBB by Fitch Ratings, the second-lowest investment-grade ranking. The yield on the country’s dollar bonds due in April 2020 rose three basis points to 2.51 percent. The yield on Russia’s ruble Eurobond due in 2018 fell five basis points to 5.813 percent.

Yield Gap

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries climbed three basis points to 161, according to JPMorgan EMBIG indexes. The difference compares with 160 for debt of similarly-rated Mexico and 142 for Brazil.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps climbed three basis points to 131, according to data compiled by Bloomberg. The swaps cost five basis points more than Turkey, which is rated one step lower by Fitch at BBB-. The contracts pay the buyer face value in exchange for underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

Russia has the world’s fourth-largest international currency and gold reserves at $526.4 billion as of Jan. 11, which decreased in the previous week by $11 billion, the most since December 2011, according to the central bank data. The decline was due to currency movements and the repayment of about $9 billion of foreign-exchange swaps by lenders to Bank Rossii, according to VTB’s Nikitin.

Monetary Easing

Bank Rossii is unlikely to undertake its own monetary easing any time soon because the economy is already expanding in line with its potential under current circumstances of about 3.5 percent a year, Ulyukayev said. Cutting interest rates or taking “quantitative easing” measures would be “counterproductive” at the moment, he said.

Ulyukayev said yesterday the strengthening currency would help bring inflation down by the second quarter. The central bank aims to move to a full inflation targeting regime by 2015 and seeks 5 to 6 percent inflation this year and 4 to 5 percent in the next two years, according to its website.

The central bank is focused on containing ruble volatility and inflation, according to Sergey Fishgoyt, deputy head of foreign exchange at Otkritie Financial Corp.

“Interventions will continue depending on the cost of the currency basket,” Fishgoyt said by phone from Moscow. “Russia won’t be an exception from the global economies implementing monetary easing, but the central bank will be protecting the ruble from over-strengthening.”

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