Photographer: Andrey Rudakov/Bloomberg

Russia’s Currency War Flounders With Central Bank on the Fence

  • Finance minister says ruble’s current rate 10-12% overvalued
  • Ruble is gaining despite government efforts to weaken currency

Russia’s latest effort to talk down its currency is misfiring, leaving the ball in the central bank’s court days before it reviews interest rates.

A warning by Finance Minister Anton Siluanov that the ruble’s current level is about 10-12 percent “overvalued compared to fundamental valuations” barely registered with investors as the ruble headed for its fourth gain in five days on Tuesday. Similar comments a week ago by the economy minister -- who pointed out that its strength exceeded fundamentals -- and Siluanov’s own remarks early this month that the exchange rate was “attractive” for buying foreign currency, have done little to take the edge off the ruble’s rally.

The verbal interventions have been beside the point because the central bank is sticking with its free float while keeping rates on pause since September, making the ruble a magnet for carry traders as borrowing costs remain near historical lows across developed economies. Although policy makers in Moscow will have a chance to narrow the rate differential when they meet on Friday, most economists surveyed by Bloomberg predict the 10 percent benchmark will remain on hold.

“As before, the only two factors that matter for the ruble are the interest-rate differential and oil prices,” said Alexander Losev, chief executive officer of Sputnik Asset Management in Moscow. “All the rest are ‘ripples on the water’s surface.’"

The ruble slipped initially after Siluanov’s comments were reported Monday, but then recovered and traded little changed. It was 0.2 percent stronger at 57.17 versus the dollar as of 4:43 p.m. in Moscow.

The Russian currency has kept up gains in the past month even as oil declined. As a result, the price of benchmark Brent crude in ruble terms has fallen to the lowest level in four months, hurting Russia’s energy-dependent budget. 

The ruble has surged as some of the world’s biggest funds increased exposure to emerging-market currencies to capture its carry returns and opportunities presented by an uptick in global economic growth. 

Societe Generale SA doubled its exposure to developing-nation currencies to 13 percent in its multi-asset funds, naming the ruble as a favorite. Man Group Plc, the world’s largest publicly traded hedge fund, BNP Paribas Investment Partners and JPMorgan Chase & Co.’s private bank division have all turned bullish on emerging-market local-currency bonds. Investors have pumped $4.5 billion into domestic debt this year, EPFR Global data show.

“A strong ruble exchange rate creates a window of opportunity for the rate cut,” Natalia Orlova, chief economist at Alfa Bank in Moscow, said in a report. “At the same time, the local interbank market had been short of dollar liquidity until January this year, resulting in increased forex rates, and continuing rate hikes in the U.S. could easily make this worse. In other words, the interest rate differential will narrow without Russian central bank efforts, with continuing Fed rate hikes.”

Currency Purchases

The Finance Ministry has tried a number of measures to weaken the ruble, whose strength has hurt Russian exporters. On top of verbal interventions, it’s started a program to use windfall revenue from higher-than-forecast oil prices to purchase foreign currency. This month, the Finance Ministry is spending 3.2 billion rubles ($56 million) daily to buy foreign exchange.

The ministry has already bought $500 million for its foreign-currency obligations this year and could add “at least $1 billion” more because “it makes sense to buy foreign currency” at current levels,” Siluanov told reporters in Baden-Baden, Germany, on the sidelines of a Group of 20 meeting.

The Finance Ministry conducts such operations directly with the central bank, and it’s started to announce and comment on them this year in a departure from previous practice. The central bank decides whether to mirror such transactions on the open market. It’s opted not to buy foreign currency in March, according to the Treasury.

Bank of Russia to rebuild reserves after hitting its inflation target

The ruble’s status as one of the most appealing carry trades in emerging markets has undermined the government’s efforts to slow the pace of appreciation. The currency has strengthened almost 7 percent this year even though Brent crude prices have declined more than 9 percent.

“The ruble is overvalued by at least 8 percent at current oil prices around $51.50 per barrel,” said Alexey Tretyakov, money manager at Aricapital Asset Management in Moscow. “This overvaluation in real terms is growing by the day.”

Russia’s real key rate is above 6 percent, VTB Capital estimates, using its inflation projections. The mean analyst forecast for the exchange rate by the end of the second quarter is 60.25 rubles per dollar, about 5 percent from current levels.

The central bank has so far declined to join a drumbeat of concern about the currency’s strength. It’s made a resumption of foreign-currency purchases for reserves conditional on meeting its inflation target of 4 percent, according to the head of its monetary policy department, Igor Dmitriev. The central bank, which in 2015 announced a goal of boosting reserves to $500 billion in the long term, hasn’t bought foreign currency for more than a year.

February inflation eased to 4.6 percent from a year ago. Price growth is on track to fall to the central bank’s 4 percent target by year-end, with the economy set to gain 1.5-2 percent, according to Siluanov.

“The economy needs a free-floating ruble,” Dmitriev said in an interview. “There’s no absolute evil or good in a strong or weak ruble.”

— With assistance by Natasha Doff

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