Russian Reversal on Ruble Fooling No One as Dollar Buying Paused

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The Bank of Russia’s insistence it has no target for the ruble is wearing thinner by the day.

Six months after announcing a free-floating exchange rate, Russia halted this year’s biggest currency rally by buying dollars every day from May 13. As the ruble then depreciated to levels that risked accelerating inflation last week, analysts from Citigroup Inc., Rabobank and Renaissance Capital said the bank would halt its purchases. On Friday, it did just that.

While Russia said Wednesday it bought $150 million two days ago as it aims to build foreign-currency reserves to $500 billion in the coming years, the timing of intervention in the past month suggests it’s also managing the ruble within a range of about 50 to 60 against the dollar, according to Rabobank’s Piotr Matys. The program helps Russia maximize export revenue as sanctions and lower oil prices drag the economy into recession.

“Current central bank actions don’t really correspond to the ruble’s free float,” Yury Tulinov, head of research at PAO Rosbank, the Russian unit of Societe General SA, said by e-mail on Tuesday. “The pause in interventions when the ruble crossed 55 against the dollar was definitely expected by the market.”

Reserves, Ukraine

The ruble tumbled 7 percent last week, the most since January, as central bank Governor Elvira Nabiullina set a target of boosting reserves by about $140 billion over the next few years amid a flare-up in fighting in Ukraine. Purchases of $3.4 billion since May 13 helped turn the currency into the world’s fourth-worst performer in the past month, paring its advance against the dollar this year to 11 percent.

Russia’s currency strengthened 2.8 percent, the most in more than six weeks, to 53.987 against the dollar as of 5:48 p.m. in Moscow on Wednesday.

“The Bank of Russia may step in from time to time even at current levels, but the ruble would have to start moving sharply toward 50 against the dollar,” Matys, a London-based foreign-exchange strategist at Rabobank, said by e-mail. “Once the outlook improves markedly and economic activity recovers, especially household spending and investments, the Bank of Russia will allow the ruble to trade freely.”

The central bank said it paused purchases on June 5 because of a surge in volatility since interventions could have strengthened “negative trends” in such a market environment, according to an e-mailed comment on Tuesday. It also reiterated that it will minimize the effect of rebuilding reserves on the exchange rate by adjusting the volume of interventions.

Not Volatile

“The Bank of Russia will continue to replenish reserves as long as the currency is not very volatile,” Ivan Tchakarov, an economist at Citigroup Inc. in Moscow and the second-most accurate ruble forecaster in a Bloomberg survey of the past four quarters, said by e-mail on Tuesday.

At current oil prices, the ruble is fairly valued at 56 against the dollar, according to Tchakarov.

Russia’s start of foreign-currency purchases last month prompted criticism by banks including Rosbank and ING Groep NV as going against the central bank’s free-float policy, in which the market sets the ruble’s exchange rate. Russia spent almost $90 billion supporting the ruble last year, eventually accelerating the move to abolish the corridor used to manage currency swings to safeguard the country’s reserves.

‘Initial Phase’

The monetary authority isn’t abandoning the free float, though “more frequent interventions on the currency market” are possible during the “initial phase” of the policy adopted in November, Nabiullina said on Thursday.

The ruble’s three-month implied volatility, a measure of exchange-rate swings, is the highest globally at 21 percent, compared with 17 percent for Brazil. Government bonds rose for a third day, pushing five-year yields 26 basis points lower.

“The central bank could resume purchases if the ruble appreciates again and becomes overvalued,” Oleg Kouzmin, a former central bank adviser who’s now an economist at Renaissance Capital in Moscow, said by e-mail on Tuesday. If not, it will “stay away from buying foreign exchange for the next few weeks.”

For more, read this QuickTake: Currency Pegs