Bank Chief Tells Traders Not to Sell Ruble Short

The Central Bank warned bankers on Friday against betting on any further ruble weakness, concluding a week when, for the first time in months, it did not have to intervene to support the currency.

The country has allowed the ruble to lose a quarter of its value versus a dollar/euro basket in three months, gradually adjusting to low oil prices and the worst economic outlook in a decade.

Two weeks ago, the Central Bank sought to put a floor under the ruble, vowing to stop it from weakening beyond 41 to the basket. But the battle forecast by market players has so far not materialized -- the ruble has stayed within the band, only touching it briefly on Thursday.

Investors are growing increasingly convinced that the regulator means business, and Central Bank Chairman Sergei Ignatyev reinforced that message at an annual meeting with bankers in a hotel near Moscow on Friday.

"Forty-one rubles -- that is serious and for a long time. And people who are counting on playing on devaluation will be disappointed. An appreciation of the ruble is not out of the question," Ignatyev told some 300 bankers, according to one conference participant, who added, "Ignatyev was brimming with confidence."

Keeping the ruble depreciation gradual has cost Russia one-third of its foreign exchange reserves, or some $200 billion, and prompted its first sovereign rating downgrades in a decade.

But the interventions gave companies and individuals time to convert their savings into foreign currency and helped to avoid public panic in a country that still remembers the 70 percent ruble collapse in 1998.

Dealers said they had seen no significant Central Bank intervention last week, yet the ruble held within the band, closing Friday at 40.86 to the basket.

The regulator had sold dollars each week since it began widening the ruble's trading band three months ago. The one exception was a week in January when it sold rubles to meet demand from companies that had to pay taxes.

Now the Central Bank has other tools to try to support the ruble. By raising interest rates and reducing the amount of rubles it lends to the banking system, it hopes to prompt banks to convert their dollars and euros back into rubles.

"If necessary, [the Central Bank promised to] cut the amount of collateral-free loans for banks, to raise interest rates on them," said another banker who attended the meeting, which was organized by an association of Russian regional banks.

"We think that this stabilization [of the ruble] might prove much more sustainable than previous support levels," UniCredit said in a research note Friday.

"The Central Bank seems to have started to limit liquidity injections into the market, which should eventually undermine the speculative run on the currency and provide support to the ruble," the note said.