No Ruble Tripwire Seen for Russia as Currency Strains Mountby
Ruble rally raises possibility authorities may counter gains
Citigroup sees no argument in favor of ‘imminent intervention’
The ruble is settling in a range where the Bank of Russia purchased foreign currency in 2015, but this time policy makers are looking the other way.
The central bank would probably consider currency interventions only after it resumes interest-rate cuts early this year, according to Bank of America Corp. The ruble remains “broadly in line with oil prices” and other measures of its fair value, “arguing against an imminent intervention,” Citigroup Inc. analysts said. The Russian currency traded below 60 against the dollar for a sixth day on Wednesday, the strongest since July 2015.
“Despite the significant ruble appreciation, all the statistics that we look at strongly suggest that the currency is broadly where it should be,” Citigroup economists Ivan Tchakarov and Ekaterina Vlasova said in a report. “Therefore, we think it is hard to make a strong case for the central bank to stem further ruble advance at the current levels against the dollar.”
The outlook for the ruble is taking center stage in policy discussions because a stronger exchange rate risks depriving the economy of the momentum it needs to shake off its longest recession in two decades. The central bank, which hasn’t cut rates since September, is allowing the ruble to trade freely, pledging for the past two years to avoid interventions unless its swings threaten financial stability.
The Bank of Russia has reduced its benchmark just twice in 2016 to 10 percent, saying last month the next decrease is more probable only in the second quarter.
“The central bank will likely consider the resumption of foreign-exchange interventions only after the renewed rate cuts in early 2017,” said Vladimir Osakovskiy, chief economist for Russia at Bank of America in Moscow. “This, we think, makes continued appreciation of the ruble an important factor pressuring the central bank to resume rate cuts sooner rather than later.”
The central bank last bought foreign currency when the ruble strengthened below 50 against the dollar in May 2015, purchasing dollars to replenish international reserves. It halted the operations in July that year as the ruble weakened toward 60.
The ruble strengthened 0.5 percent against the dollar on Wednesday, adding to its gain of more than 3 percent in 2017. It had its best-ever year in 2016, when it appreciated 20 percent. Forward-rate agreements are signaling 30 basis points of decreases in borrowing costs during the next three months, compared with December’s high of 44.
One sign the ruble remains vulnerable is that Russia’s current-account surplus fell to $22.2 billion in 2016, the lowest level since the currency crisis of 1998, as a recovery in imports outpaced that in exports. The decline makes the ruble more sensitive to cross-border capital flows.
“Stagnating exports and rising imports could be a sign of excessive ruble strengthening,” Sberbank CIB analysts Anton Stroutchenevski and Rodion Lomivorotov said in a report. “We would not rule out a modest ruble correction once the market decides that it is time to lock in carry trade profits.”
To ease pressure on the ruble, Russia will contain any windfall from higher oil prices this year by using it to cover the budget deficit and reduce spending from its wealth funds, Finance Minister Anton Siluanov told reporters in Moscow on Wednesday. Under a plan approved by President Vladimir Putin, the policy will remain in effect until the end of 2017, he said.
Siluanov has previously warned that spending extra energy income can stoke ruble gains and threaten the nation’s exporters. Should Urals crude blend average more than the $40 price used to calculate this year’s budget, Russia stands to earn an extra 1 trillion rubles ($17 billion) in revenue or more, the Finance Ministry estimates.
The decision “not to spend oil and gas revenue makes monetary policy more predictable and allows the central bank more space for maneuver in monetary policy from the point of view of cutting rates and ensuring the stability of the ruble’s exchange rate,” Siluanov said.