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. Last Updated: 07/27/2016

Reform Doubts Don't Shake the Ruble

With the course of economic reform taking some seemingly ominous turns in recent weeks, the latest news out of Russia has Western governments pondering, financiers squirming and pundits railing.

But the ruble keeps right on going.

Down, yes -- but the Russian currency's monotonous record of dropping several points a day brings its own meaning to the word stability. And no one seems surprised.

"I think it actually shows a pretty developed market," said Tom Reed, an analyst with the investment house AIOC Capital. "[The ruble] is not responding to the statements of the government, but to the situation in the market."

But it remains to be seen whether the currency's controlled fall, orchestrated by the Central Bank, will hold until summer, or come under a pre-election attack by banks fleeing short-term state treasury bills in favor of the stable dollar.

Why the ruble would hold steady with the exit of top reformer Anatoly Chubais from the cabinet, the onset of a back-wages crisis and labor strikes, worries over an expected $9 billion IMF loan and presidential decrees calling for increased social expenditures, is more of a study in politics than economics.

"In the West, when you have some promises from the government, you would expect that these promises would be delivered," said Pavel Teplukhin, an expert with the Russian-European Center for Economic Policy. "In Russia, market participants are used to the fact that a government promise doesn't necessarily mean delivery."

Adding to the market's show-me-don't-tell-me attitude is a widespread belief that the ruble is undervalued, and the Russian Central Bank's ability to keep a much tighter reign on the ruble than most Western banks have on their currencies.

Another factor is the isolation of Russia's markets, which leads to far less activity than in Western currency markets.

"Our internal market is a closed market," said Igor Doronin, an analyst with the Moscow Interbank Currency Exchange. "It's only for residents."

In the short term, the pending introduction of a new U.S. $100 bill, expected in late February or March, also helps prop up the ruble, as moneyholders seek to keep their cash in the Russian currency to avoid complications with the changeover. Dealers said fears about the dollar switch led to about a five-point increase on Friday's interbank market, the rate at which banks lend to each other.

Since peaking at 4,405 to the dollar last August after a dramatic three-month rise on the Moscow Interbank Currency Exchange, the ruble took 43 days to slide from the 4,400s to the 4,500s, 40 days to reach the 4,600s and 28 days to hit the 4,700s.

On Friday, it fell another two points on the MICEX to settle at 4,738 to the dollar. The drop marks a total of 14 points lost for the week -- a rate that, if constant, would represent a 15-percent devaluation over the course of a year.

A fall of 14 points a week would also maintain the government's ruble corridor of 4,550 to 5,150 to the dollar, sending the ruble to 5,032 on the day the corridor is set to expire, June 30.

Indeed, June dollar futures traded at 5,045 to the dollar on Wednesday's MICEX. Shorter-term contracts for March clocked in at 4,864, and for April at 4,927.

But this steady pace could change should commercial banks, in search of a stable roost before the June 16 presidential elections, move their rubles from three-month treasury bills to the dollar. That could flood the market with rubles, causing a devaluation that would threaten the corridor.

"I can't exclude the possibility that ... the Central Bank would be in a difficult position," Doronin said, adding that if yields on T-bills continue to decline, banks may look to foreign-currency operations.

But most analysts said the Central Bank's hard-currency reserves of $12 billion are ample to protect the ruble, and that there is little in the markets to indicate a pre-election panic.

Also, the government has been slowly channeling fixed-income investments to longer-term bills that will mature in six months or a year, after the mid-June presidential elections.

"I don't believe that anyone thinks this country is going to melt down on June 16," said Reed of AIOC Capital. "And if you look at the dollar votes of the people in the currency markets, they don't think it will either."