Central Bank Shores Up Ruble

APA currency exchange sign offering to sell dollars at a rate of 27.30 rubles each in central Moscow on Monday.
With the dollar costing more than 27 rubles on Moscow's streets, the Central Bank fought back on Monday by limiting speculative attacks on the currency.

The new restrictions spurred the ruble into making its biggest gain against the dollar in nine years, but some banks warned that the ruble would continue to decline.

The Central Bank decided Monday to limit currency swaps, a practice in which traders exchange borrowed rubles into dollars on the assumption of the ruble's decline. The bank said it would announce limits on currency-swap operations by 10 a.m. every day, and it put Monday's limit at 50 billion rubles ($1.9 billion).

Currency swaps have become increasingly popular, as the ruble has lost 12 percent against the dollar and more than $60 billion has flowed out of Russia since early August. The purchase rate for the dollar at currency exchange offices on Moscow streets rose past 27 over the weekend, prompting the Central Bank to consider urgent, immediate measures, economists said. Some currency exchange offices set their rates at more than 28 rubles to the dollar on Monday.

"For a number of years, households have been told that the ruble is stable and that the ruble is the currency you should be making your deposits in," said Mikhail Galkin, fixed-income analyst at MDM Bank. "If people lose their confidence in the ruble, there will be a massive capital outflow."

Since August, the ruble has depreciated in tandem with declining oil prices, falling 3.6 percent against the dollar-euro basket during a time when crude oil has lost more than half of its value. In response, the Central Bank has sold $27 billion of its reserves since Aug. 1, MDM Bank said. Last week, the bank increased the interest rate on currency swaps from 8 percent to 10 percent.

After the Central Bank announced the latest restrictions Monday, the ruble gained as much as 1.8 percent against the dollar, rising as high as 25.88 in its biggest gain since May 17, 1999. It was at 26.31 by 4:53 p.m., compared to a high of 26.35 last week, Bloomberg reported. The ruble rose as much as 1.2 percent to 34.93 per euro, from 35.34 last week.

The Central Bank set the official exchange rate for Tuesday at 26.06 to the dollar and 35.17 to the euro.

Economists and analysts had mixed feelings about how much the Central Bank should intervene to prop up the ruble, given the country's dependence on commodity prices, which have been declining since August. For now, government intervention seems like a reasonable way to prevent further depreciation of the ruble, said Vladimir Osakovsky, an economist at UniCredit Aton.

However, Marina Vlasenko, a senior credit analyst at Commerzbank in Moscow, expressed concern that limiting speculation might in turn hurt the Russian debt market in terms of its ability to serve as a source of refinancing for Russian banks and companies. "I think the decision to punish the speculators was kind of difficult because it really created a lot of panic on the local debt market," Vlasenko said. "In a situation where there is already a lot of panic on the money market, I think it really adds up."

Local banks had essentially been borrowing rubles from the Central Bank and using them to buy more rubles in the currency swaps, Galkin said. "The banks were borrowing rubles against their growing foreign currency position," he said. "For the Central Bank, it made sense because it's kind of sad to see people playing against you and using your own money to do that."

Some international banks, however, expect the ruble to continue to weaken. France's BNP Paribas warned investors in a research note that the ruble would most likely continue to drop, and JPMorgan said the ruble could decline as low as 32 versus the dollar-euro basket by the end of this year.

At an International Monetary Fund panel in Moscow, former and current IMF representatives called on the Central Bank to allow the ruble to stabilize on its own and to not dip much further into Russia's $530.6 billion forex reserves. While Russia has announced that it will at some point switch from a managed exchange rate to a free floating one, Vlasenko said the state should wait for increased stability before implementing such a measure.

"When we have billions of dollars of capital outflow, it seems like frightening investors is not a good game," she said, Reuters reported.