Ruble Rally Continues For a 5th Straight Day

MTA man changing numbers Thursday at a currency exchange on Tverskaya.��
The ruble extended its rally to one week on Thursday after sharp losses in previous weeks, finding support from oil prices, liquidity shortages and moves by the authorities to impose informal capital controls.

The ruble strengthened by 40 kopeks to 39.37 versus the dollar/euro basket, bringing gains to 3.6 percent since Feb. 5, when it briefly touched the Central Bank's support level of 41.

But the regulator has not had to sell a single dollar in the past week as the oil price has hovered above $40 per barrel and the government pledged to cut budget spending in line with the price of oil.

The Central Bank also raised minimum rates on repo auctions, its main tool to provide liquidity, to further discourage bets against the ruble. The currency also got a boost from prosecutors, who sent a letter to 70 banks warning against currency speculation.

"The Russian authorities have been seeking through moral suasion to prevent banks from converting the Central Bank's liquidity provision into foreign exchange and weakening the ruble," said Douglas Busvine, an analyst at policy research firm Medley Global Advisors.

"This letter steps up the pressure and amounts to the imposition of informal capital controls," he added.

Russia was forced to devalue the ruble by 35 percent versus the basket in the past six months because of capital outflows and the collapse of budget revenues because of lower oil prices.

The government has said it would not return to capital controls despite distribution of billions of rubles to banks to support the economy, which is set to contract for the first time in a decade this year.

Repeated pledges were coming despite the fact that money was often ending up on the forex market instead of supporting the economy, thus further speeding up the devaluation.

Prime Minister Vladimir Putin and the Central Bank Chairman Sergei Ignatyev have already warned bankers against betting on any further weakness.

Prosecutors said this week that they had set up a special task force with other security agencies and the Central Bank to make sure that state money is used to support the economy.

Last year, the Central Bank issued a warning to commercial banks that the size of their open currency positions will count when they come to seek liquidity lifelines.

"That's been going on for a couple of months. They have made it fairly clear that if you are going to benefit from the bailout you have to play ball," said Tim Ash, head of CEEMEA research at Royal Bank of Scotland.

The Central Bank vowed to defend the 41 upper level of the ruble versus the basket if the oil price does not fall to $30 per barrel and remains at this level for some time.

"They have made an adjustment, it's taken some pressure off the system. ... The endgame is still a float," Ash added.

The head of dealing at Metalloinvest bank, Sergei Romanchuk, said his bank had not received any letter from prosecutors.

"I don't think it has had an impact on the market. These are not banks that determine the rate. Much depends on the clients' mood, mainly on the behavior of large firms," he said.

The ruble could strengthen further in coming days amid a peak of large corporate tax payments.

"The speculators are playing in the other direction and are trying to find the Central Bank's bid level," said currency dealer Anton Vorovatov from Nomos Bank.