Central Bank Allows Ruble to Slide Again

MT
The Russian Central Bank allowed the fifth 1 percent devaluation in the ruble against the dollar/euro basket in a month on Thursday as fresh data showed a $17.9 billion drop in gold and forex reserves last week.

The ruble weakened as far as 31.89 from 31.63 against the basket, made of 0.55 dollars and 0.45 euros, at the start of the trading session. It closed at 31.84. The ruble is down 8.3 percent from historic peaks set in early August.

The reserves fell to $437 billion on Dec. 5 from their peak of $597.5 billion on Aug. 8 when Russia sent tanks to Georgia, triggering a wave of capital flight. Since then, the Central Bank has been selling dollars to support the ruble.

On Thursday, dealers said the regulator did not need to sell dollars to defend the new support level as investors bought rubles on expectation that there will be no more moves this week.

A source at the Central Bank confirmed that the regulator had widened the ruble's trading band to the basket, used to guide the exchange rate policy. In an environment of low oil prices and capital outflows, such widening leads to a weaker ruble.

Finance Minister Alexei Kudrin told reporters that he fully backed the Central Bank's policy while the bank's Chairman Sergei Ignatyev declined to comment. The Central Bank has kept a low profile since the start of the depreciation in November.

The move followed the release of the third-quarter GDP data, which showed growth slowing to a three-year low. Analysts have said that with the price of oil also at a three-year low, the gradual depreciation policy was not working.

"If forex reserve depletion continues at the current rate and oil prices fail to rally, the Russian authorities are likely to undertake a more aggressive, one-off move to weaken the ruble," said Timothy Ash from Royal Bank of Scotland.

Ash argued that such a move may come around a 10-day New Year's and Orthodox Christmas holiday next month when banks will be closed, which will help avoid a run on deposits in commercial banks.

Russian officials, including Prime Minister Vladimir Putin, have said there will be no sharp fluctuations of the ruble.

A stable currency is viewed as one of the most significant achievements of Putin's eight years as president. Officials admit that the ruble must adjust to lower oil prices.

"This quarter and the next quarter, the authorities will see how badly the economy is hurt and that should, if anything, speed up the depreciation," said Citi analyst Elina Ribakova said.

Russia aims to fully float the ruble within three years as part of a transition to an inflation-targeting regime.

"In our view, it would make sense to speed up the widening of the trading band and let the market help find a reasonable level for the ruble, thus avoiding draining forex reserves excessively," said Lars Rasmussen at Danske Bank.