Market on Tenterhooks as Putin Wants to React to Ruble Gains

  • Government concerned stronger currency may worsen budget pinch
  • Bank of Russia pledged to avoid interventions after free float

Now that President Vladimir Putin has said it, the market is wondering what Russia will do about a stronger ruble.

“The ruble is strengthening despite price volatility on commodity markets,” Putin said on Tuesday at a meeting with Prime Minister Dmitry Medvedev in the Black Sea resort of Sochi. “Of course we need to think about how and what we’ll be doing in the near future in connection with these factors.” The Russian currency extended its declines against the dollar after Putin’s comments, weakening the most since June 24.

Ruble gains are putting a strain on the budget by shrinking the value of a barrel of oil in local-currency terms and depriving the government of revenue as it runs the widest deficit since 2010. Unlike other major emerging economies like Brazil, where the central bank has stepped up efforts to limit the real’s appreciation since March, the Bank of Russia hasn’t bought foreign currency for a year, pledging to avoid interventions unless the ruble’s swings threaten financial stability.

“The market is scared of missing out on the start of ruble weakness,” Alexei Egorov, an analyst at Moscow-based Promsvyazbank PJSC, said by phone. “Right now the market is afraid that the central bank will come out with interventions. The country’s leadership understands that it needs to boost the ruble price of oil, and they can only do that at the current oil price by weakening the ruble.”

Ruble, Real

The ruble is the best performer worldwide this year after Brazil’s real with a gain of more than 16 percent. It rebounded on Wednesday after weakening 1.1 percent a day earlier. The currency traded 0.5 percent stronger at 63.24 against the dollar as of 12:07 p.m. in Moscow.

Another option is for the central bank to extend monetary easing after its first interest-rate cut in almost a year last month. For now, all but three of the 23 economists surveyed by Bloomberg predict the key rate will remain at 10.5 percent when it reviews borrowing costs next week.

The central bank and the Finance Ministry didn’t respond to e-mailed requests for comment after Putin’s statement.

Free Float

Governor Elvira Nabiullina has said the Bank of Russia has no plans to influence the exchange rate and credited its free float for helping soften an economic contraction that’s extending into the second year. While Putin has stood by central bank policies, the president praised a weaker exchange rate for throwing a lifeline to struggling domestic producers months after the central bank shifted to a free float in late 2014, a move that also helped offset budget losses from the collapse in energy prices.

The Bank of Russia last stepped into the foreign-currency market when the ruble strengthened below 50 against the dollar in May 2015, purchasing dollars to replenish international reserves. It halted the purchases in July last year as the ruble weakened toward 60. Nabiullina said on June 10 that under the central bank’s base case, it’s unlikely to be buying dollars for reserves again until the end of 2018.

The world’s biggest energy exporter received 36 percent of its budget revenue from oil and gas in the first half of the year, down from an average of 44 percent in 2015, according to calculations based on Finance Ministry data.

Brent crude has declined almost 6 percent this month, and the ruble is up 1.1 percent against the dollar. The Russian currency’s 60-day correlation with oil has been declining, falling to the lowest level since August.

“The breakdown of the ruble’s tight relationship with oil prices is clear,” Tom Levinson and Iskander Lutsko, analysts at Sberbank CIB, said in an e-mailed note before Putin’s meeting. “Back in May when Brent was last near its current prevailing $47 per barrel, the ruble was close to 66 per $1.”

Russia is drafting its budget for the next three years after the Finance Ministry proposed keeping the fiscal gap at 3.2 percent of economic output in 2017. It then plans to reduce it by one percentage point each year to balance the budget by 2020. The government is also discussing a fiscal mechanism known as the budget rule that would prevent it from spending surplus revenue above a pre-set oil price.

The central bank won’t try to weaken the currency through “front-loaded policy easing” because that would contradict its goal of bringing inflation to 4 percent next year, according to Oleg Kouzmin, chief economist for Russia at Renaissance Capital in Moscow.

Putin’s words may signal that “it’s possible to accelerate the introduction of the budget rule and the mechanism of withdrawing excess foreign-currency revenue from the economy,” Kouzmin said.

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