Ruble Rallies Most in Nine Months on Pension Bets as Bonds Climb

The ruble surged the most since September as investors speculated the government will use a windfall oil fund to cover the pension shortfall and exporters bought the local currency to pay taxes. Bonds rose.

The ruble strengthened 1.3 percent against the central bank’s dollar-euro basket to 36.7481 by 6 p.m. in Moscow. The yield on OFZ ruble bonds due 2027 declined 15 basis points to 7.70 percent, the sharpest drop since Jan. 9.

The government must decide to what extent the $87 billion National Wellbeing Fund can be used to cover the pension deficit, President Vladimir Putin said in an annual budget address in the Kremlin today. The shortfall is estimated at 943 billion rubles ($29 billion) this year, according to the Pension Fund. Exporters bought the currency to make tax payments, taking advantage of its drop on June 11 to the weakest level in a year, according to Alfa Bank.

For Russia to tap the Wellbeing Fund “they must sell their foreign currency assets, for example, foreign AAA-rated government bonds, get foreign currency and sell it for rubles,” Vladimir Miklashevsky, strategist at Danske Bank, said in e-mailed comments.

The next tax period, during which Russian exporters convert their foreign currency-denominated revenue into rubles, starts on June 17 with transfers of mandatory pension and insurance fund contributions.

“Today it was all export,” Igor Akinshin, foreign-exchange trader at OAO Alfa Bank, said by phone from Moscow. “Quite a large number of exporters decided to take advantage of a high rate ahead of the tax period. So far we can talk only of correction, not a turnaround.”

Bonds Stabilize

The currency appreciated 1.3 percent versus the dollar to 31.9810, with three-month volatility falling to 10.265, 93 basis points below the highest level this year, data compiled by Bloomberg show. The Bloomberg Composite Index of emerging market dollar-denominated debt rose to 131.894. The index is down 5.6 percent from its high on May 2.

“Both OFZs and other EM bonds are stabilizing in the last couple of days,” Vladimir Kolychev, head of research at OAO Rosbank, said in e-mailed comments. “It’s too early to talk of a turnaround, but clearly the levels are already very appealing.”

Concern the U.S. Federal Reserve will taper its bond buying program curbed appetite for riskier emerging-market assets, driving the yield on the 2027 OFZ bond to the highest since October on June 11.

Liquidating Longs

“There are still many foreign investors who can keep liquidating their longs out of quantitative-easing concerns,” Kolychev said.

Outflows from Russia-dedicated bond funds accelerated to $93 million in the week to June 5 from $24 million, OAO Gazprombank said June 7, citing EPFR Global data. Net outflow from emerging-markets bond funds, where Russia’s weight is about 10 percent, totaled $1.65 billion in the week to June 5.

Longer-maturity OFZ bonds look attractive, even after increased foreign access to the debt in February fanned volatility, according to Vladimir Potapov, chief executive officer of VTB Capital Investment Management, which manages 190 billion rubles, including over 100 billion rubles in fixed income funds.

Inflation, which reached 7.4 percent in annual terms in May, is set to peak, allowing the central bank to lower its main short-term interest rates, which have been unchanged for nine months, Potapov said in a Bloomberg interview June 11.

Bank Rossii, which reports intervention data with a lag, bought rubles on the market equivalent to about $200 million on June 10, according to a website statement today. Crude oil, Russia’s main export earner, gained 0.3 percent to $103.80 a barrel in London.

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