Russia's $796 Million Error Sinks FX Purchases Into Irrelevance

  • Finance Ministry says daily purchases will be down almost 90%
  • Government seeking ‘market-based’ steps to stabilize currency

Foreign-exchange purchases by Russia’s Finance Ministry will be so negligible in the coming weeks that they will do little to cool off the ruble.

Daily purchases, conducted since February to soak up extra oil and gas budget revenue, will be down almost 90 percent in the coming weeks from a month earlier after an error in calculations, the Finance Ministry said in a statement on Thursday. 

Windfall energy income in April fell 46 billion rubles ($796 million) short of its projections, meaning that amount will be subtracted from May’s estimate of 54.5 billion rubles, the ministry said. Daily purchases will plummet to 400 million rubles from May 10 to June 6, compared with 3.5 billion rubles in the month through May 5.

“Such a tiny volume of daily purchases means that the Finance Ministry will be nearly non-existent on the foreign-exchange market in May,” said Dmitry Polevoy, an economist at ING Groep NV in Moscow. “Other factors affecting the ruble will become more important.”

With the Bank of Russia staying out of the currency market, the Finance Ministry’s program was among the few tangible steps taken by the authorities to hold back the ruble after its best-ever year in 2016. But elevated interest rates and stabilizing oil prices have ensured the ruble remains a magnet for investors, with the Russian currency appreciating by more than 6 percent against the dollar so far in 2017.

The rally has threatened the competitiveness of exporters while eroding Russia’s budget intake from energy sales. The government monitors ruble stability “practically on a daily basis” and is looking for “market-based measures” to shape the exchange rate, President Vladimir Putin promised entrepreneurs in April. 

The ruble is stumbling this week as oil dropped and the Bank of Russia unexpectedly deepened its pace of monetary easing last Friday, blunting the currency’s appeal as a carry trade. It’s headed for a third day of losses, trading 0.9 percent weaker at 57.8750 against the dollar as of 2:19 p.m. in Moscow.

‘Other Measures’

“Reducing the amount of FX purchases would help the ruble, but it is important to look from a wider perspective,” said Piotr Matys, an emerging-market currency strategist at Rabobank in London. “Even if the Finance Ministry starts buying less in May, this could be offset by other measures that could be revealed as President Putin suggested.”

The discrepancy in April was primarily a result of much lower-than-estimated exports of gas and oil products, according to the Finance Ministry. If the current conditions hold, Russia will spend more to acquire foreign currency in the coming months, it said. In the three months it’s conducted the operations, total purchases have reached 253.5 billion rubles.

The ruble is at a level where it no longer bothers the Finance Ministry, said Vladimir Miklashevsky, senior strategist at Danske Bank A/S in Helsinki.

“Markets have overreacted after the announcement by selling the ruble and now are buying it back,” he said. “Weak oil prices remain the major negative driver for the ruble, carry stays high. The ruble continues to live in a free float.”

— With assistance by Andrey Biryukov

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