Central Bank Promises to Defend Sinking Ruble

MTThe ruble fell to 40.40 against the basket, 2 percent from the floor of 41.��
The Central Bank on Friday vowed to defend its floor for the ruble, including through interest rates, as the currency sank to new lows.

As a first step, the Central Bank raised interest rates on some operations to fight inflation and stabilize the ruble's exchange rate.

But the Central Bank's news release had no mention of any changes in minimal interest rates for repo options, the main tool for liquidity injections.

The ruble fell as far as 40.40 versus a dollar/euro basket, just 2 percent from the level of 41 set last week by the Central Bank as the boundary of its trading band, as it tried to put an end to 2 1/2 months of weakening.

The government has allowed the currency to lose more than one-fifth of its value since November in order to adjust to a dive in commodity prices and the worst economic outlook in a decade.

But making the fall gradual has cost Moscow one-third of its currency reserves amid political concerns about the impact on ordinary Russians.

Officials now say the ruble is near fair value, but markets are expected to test the Central Bank's resolve to defend the new trading corridor.

"There is going to be one almighty fight at 41," said a dealer at a foreign bank in Moscow.

Dealers said the Central Bank did not intervene to support the ruble on Friday.

Ignatyev affirmed his commitment to the band, saying it would be defended with market interventions and interest rates.

The ruble also hit record lows of 46.40 per euro and 35.83 per dollar on Friday, before slightly trimming losses.

Deputy Prime Minister Igor Shuvalov said Friday that it could weaken further to 36 per dollar in the current climate, but he added that Russia's ruble policy had not changed and the adjustments that have happened were necessary corrections.

A poll of economists saw the ruble ending the year at 41.45 to the dollar/euro basket, only about 3.4 percent from current levels and just slightly beyond the Central Bank's trading boundary.

One advantage of the weakening ruble, highlighted by Finance Minister Alexei Kudrin in remarks to the State Duma on Friday, is that it raises the value of Russia's dollar export revenues, partially compensating for falling prices.

Kudrin said that this year would likely bring zero growth, a budget deficit of 6.1 percent of gross domestic product based on current spending plans and capital outflows of $100 billion.

Though glum, his outlook was brighter than some expected — newspapers had reported that the deficit would be at least 7 percent of GDP in 2009, while some analysts expect the economy to contract by as much as 3 percent.

With such an outlook, the country's remaining $386.5 billion of currency reserves are a key asset that will enable it to prop up the economy, plug holes in the budget and defend its currency.

"We should not spend all our reserves during the current year," Shuvalov told the Duma, adding that the current crisis would likely last three years and that Russia may need the cash later.

Another way to help the ruble is for the Central Bank to limit its liquidity offerings to the banking sector, which could prompt banks to convert foreign currency back to rubles.

On Friday, the Central Bank slashed the money on offer at its first daily repo auction by 100 billion rubles to 375 billion rubles ($10.5 billion). Bids at the tender exceeded supply by more than 50 percent.

The bank also raised rates for fixed-rate repos and lombard loans.

From Monday, the rates will rise to 11 percent from 10 percent on one-day and seven-day fixed-rate repos, the Central Bank announced in a statement.

Rates for lombard notes for one day to 30 days will rise to 11 percent from 10 percent to 10.25 percent.