Ruble’s Two-Minute Rally Shows Russia Guessed Wrong

The Russian central bank’s gambit worked for all of about two minutes yesterday.

That’s how long the ruble rallied after policy makers surprised investors by ratcheting up the benchmark interest rate 1.5 percentage points to 9.5 percent in the afternoon. After that, it was right back to declines for the world’s worst-performing currency, with losses swelling to as much as 3.6 percent against the dollar, the biggest drop in three years.

While the rate increase was a full percentage point bigger than analysts expected, it was what policy makers opted not to do -- revamp their foreign-exchange intervention program -- that got traders’ attention the most and turned sentiment back against the ruble. Speculation two days ago that a plan would be unveiled to allow the Bank of Russia to be less predictable and more aggressive in its interventions had fueled the biggest rally since at least 2003, briefly snapping a selloff that had pushed the ruble down to record lows day after day.

“The rate increase alone doesn’t change anything,” Dmitry Polevoy, chief economist for Russia at ING Groep NV, said by e-mail yesterday. “The central bank either doesn’t understand the root of the problem or is afraid to act. Or both.”

The ruble has been plunging as Russians pull capital out of the country amid a standoff with the U.S. and its allies over President Vladimir Putin’s actions in Ukraine. Sanctions imposed by the White House and the European Union have shut Russian companies out of foreign capital markets and threaten to push the $2 trillion economy into recession.

More Freedom

The ruble weakened 3.3 percent to 43.0140 per dollar at 8:34 p.m. in Moscow yesterday, the biggest daily drop since August 2011. Since Putin began his incursion into Ukraine’s Crimea peninsula eight months ago, the ruble is down 17 percent.

Goldman Sachs Group Inc. and Commerzbank AG said policy makers should have scrapped the intervention rules to gain more freedom to smoke out speculators by selling dollars without warning or limit. Russia has spent $71 billion of its reserves to defend the ruble this year.

The 1.5 percentage-point increase carried out by Central Bank Governor Elvira Nabiullina was bigger than the half-point move expected by a majority of the 31 economists surveyed by Bloomberg.

The Bank of Russia, which is seeking to rein in surging consumer-price increases, will be ready to start monetary easing if “external conditions improve” and inflation shows a “stable downward trend,” according to its statement yesterday.

Automatic Intervention

Under the current rules, the central bank automatically intervenes to defend the ruble once it reaches the boundary of its trading band. Once it has spent $350 million supporting the currency, the central bank moves the band by 5 kopeks. It repeats the process each time the currency falls by 5 kopeks.

Policy makers are showing “consistency” by sticking to their plan of moving to a free floating exchange rate only in 2015, according to Vladimir Osakovskiy, chief economist for Russia at Bank of America Corp. in Moscow.

The central bank said in an e-mailed statement to Bloomberg News that its intervention policy didn’t change on Oct. 30, when the ruble gained as much as 5.1 percent per dollar. The bank said it only intervenes at the edge of its corridor for the ruble. The statement yesterday announcing the interest-rate increase made no mention of its ruble policy.

Testing Nabiullina

While the interventions have reduced Russia’s reserves 14 percent this year to $439 billion, that’s still a fraction of the $222 billion drop between August 2008 and March 2009 when Lehman Brothers Holdings Inc.’s collapse triggered a slump in oil prices. Policy makers sold about $74 billion of foreign currency in December 2008, compared with $28 billion over the course of most of October, central bank data show.

“The scale of reserves losses is not that dramatic, especially compared with 2009,” Osakovskiy said.

The longer Nabiullina keeps the intervention policy crystal clear, the longer traders will profit from betting on further depreciation, Goldman Sachs analysts Clemens Grafe and Andrew Matheny said.

“The market is likely to test if the central bank is sticking to its ruble intervention policy in the coming days,” Grafe and Matheny wrote in a research note.

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