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. Last Updated: 07/27/2016

Central Bank Battles to Steady Ruble

The ruble strengthened Wednesday but, for the third day in a row, the Central Bank paid dearly in what has become a two-fronted battle to push interest rates down while defending the Russian currency.


Igor Doronin, spokesman for the Moscow Interbank Currency Exchange, estimated that the bank spent $100 million fending off speculators Wednesday, nudging the ruble up to 2,160 to the dollar from 2,161.


Over the recent three-day run on the currency, the Central Bank may have spent as much as $500 million to promote its policy of a steadily falling ruble, Doronin said. After hitting a new record of $313 million, net volume eased Wednesday to $115.5 million, indicating that speculators have taken a breather.


But there appears to be more behind the Central Bank's policy than just the stability of the Russian currency. According to Doronin and traders on the exchange, the Central Bank views a steady ruble rate as a plug in a dike holding back a flood of money.


If the ruble rate falls sharply, money is likely to rush into dollars. This would result in the undoing of a year of hard-earned stability on the ruble market that has forced funds out of currency speculation into the short-term credit markets and government bonds.


As money that had been playing the currency market began to compete more and more aggressively in the treasury-bill and credit markets, the excess supply of rubles brought interest rates -- that is, the cost of money -- down.


Last week, at the government's 17th auction of three-month treasury bills, the average annualized yield fell 24 points to 127 percent.


This in turn allowed the Central Bank to make its seventh and largest cut in its refinancing rate this year, to an annualized 130 percent from 150 percent.


As interest rates fall, the economics of the Central Bank's thinking are simple: Betting on the fall of the ruble must not become a better deal for investors than interest rates on bonds and loans.


Despite a lapse in the first quarter of the year, the ruble has been relatively stable for almost 12 months.


From July to July, the monthly decline in the ruble averaged 5.3 percent and in 1994 the average has dropped to 2.1 percent.


As a result of this ruble speculators could not keep pace with inflation, which has averaged 9.7 percent monthly this year, by playing the currency markets.


They have, however, found profit and protection in the bond market. With annual interest rates initially at around 210 percent -- offering a monthly rate of 17.5 percent -- their earnings took care of inflation and left profit on the side.


Even at the 10.5 percent current monthly rate offered in the most recent treasury-bill auction, the bills are still more attractive than dollars. In fact, some foreign investors have earned handsome profits converting their dollars into rubles and buying Russian T-bills.


But inflationary fears, which have been ignited this month by a fresh infusion of credit to industry, have threatened to end the quiet on the ruble front.


At its record low of 2,171 per dollar last week, the ruble had lost 5.3 percent of its value this month, more than in the entire month of July.


Volumes on the currency exchange began to surge as speculators sensed an opportunity and the Central Bank was forced to move in strongly.


It remains uncertain, however, whether the bank will have the financial strength to keep the plug in the dike.


In April, it reported foreign currency reserves of $3.9 billion, Doronin said, and the July figure is between $5 and $6 billion.


Yet if the government continues to pump credits into the economy -- credits that often end up on the foreign exchange market -- and if inflation reaches 10 percent a month again as government officials have predicted, the bank could be forced to admit defeat.