Investors Chase Missing Pieces of Russia Intervention Jigsaw

Updated on
  • Most economists see currency purchases resume with oil at $50
  • Central bank suspended operations to build up reserves in July

Governor Elvira Nabiullina says the Russian central bank is waiting for ruble volatility to subside before resuming foreign-currency purchases to replenish its reserves. Economists see other pieces to the data jigsaw policy makers may use to end their three-month pause.

The Bank of Russia will resume its interventions this year if oil trades at about $50 a barrel, according to 10 of 17 analysts in a Bloomberg poll. The ruble will have to strengthen to 57 against dollar for the central bank to resume foreign-exchange purchases, according to the median estimate in the survey. Brent crude for December settlement gained 0.5 percent by 10:24 a.m. in Moscow, sending the ruble up 0.2 percent to 62.1290 versus the dollar.

Competing policy priorities are pulling at the central bank as it pursues a target of about $500 billion for reserves without compromising its free float. After burning through a fifth of its holdings to prop up the ruble last year, the Bank of Russia bought about $10 billion between mid-May and late July before suspending purchases after a bout of ruble weakness and a spike in volatility.

“The dollar-ruble rate below 60 takes the exchange rate into an ‘active zone’ for the central bank’s FX purchases -- however, it will not alone be the ‘trigger,’” Tom Levinson, senior foreign currency and interest rates analyst at Sberbank CIB in Moscow, said by e-mail. “The Bank of Russia will also take into consideration whether the ruble is fundamentally misaligned or risking financial instability.”

‘Approximately’ Unchanged

Nabiullina said in an interview last week that international reserves will remain “approximately” unchanged through the start of next year, with the central bank monitoring ruble volatility as it waits to resume currency purchases. The stockpile rose to $373.8 billion rubles as of Oct. 9 after falling to a seven-year low of $350.5 billion in April.

The ruble’s “level may not be that important,” said Christopher Shiells, senior emerging-markets analyst at Informa Global Markets in London. Instead, the central bank may look for “a period of stability and expectation that the trend for the ruble is stronger.”

The Russian currency’s moves are still too hectic to resume market purchases, Nabiullina said in the interview. Its three-month historical volatility, a measure of price swings, is at 25.1. While that’s well below the 59 level reached in February, it’s the second-highest among its emerging-market peers after the Brazilian real, according to data compiled by Bloomberg.

‘Qualitative Assessment’

“We look at different volatility indicators: intraday volatility, realized, implied, three-month and so on,” Nabiullina said. “We do a qualitative assessment in order to make a decision.”

The central bank has defended the operations as compatible with its free float and has pledged to avoid interventions unless the ruble’s swings threatened financial stability. That’s been met with skepticism from analysts, and Economy Minister Alexei Ulyukayev said in June that policy makers owed an explanation to avoid confusing investors.

While the ruble was near 50 against the dollar when the central bank started buying foreign currency on May 13, the threshold for resuming the purchases may now be higher, according to BNP Paribas SA and Raiffeisen Bank International AG.

‘Weak Ruble’

“We are seeing Russia follow a weak ruble policy for a more prolonged period of time,” said Gunter Deuber, an analyst with Raiffeisen in Vienna. “Such a policy could be supported with earlier FX purchases this time around.”

While Russia’s reserves are sufficient by the International Monetary Fund definition, that view doesn’t factor in potential investment outflows, according to Piotr Chwiejczak, a strategist at BNP Paribas in London.

“Russia remains a sanctioned country and is therefore running a higher risk of sudden capital outflows if geopolitical tension increases,” he said. That means the central bank is “likely to conduct very cautious policy and is likely to start accumulating FX reserves much sooner than in previous periods.”