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. Last Updated: 07/27/2016

Russia Fights Market To Hold Ruble, Rates

Russia was caught between the need to support the ruble and keep interest rates stable Wednesday as it fought the markets to steady the economy.


The Finance Ministry snubbed the bond market at the weekly treasury bill auction, using some treasury funds to pay off maturing bills when investors demanded what it considered an unreasonably low price for new issues.


At the same time, it sucked ruble funds out of the foreign exchange market to put a floor under the soggy currency.


Rocking currency and bond markets have stoked fears that foreigners will flee the country with funds necessary to keep 1998 budget plans on track, economic growth alive and interest rates low.


"Now we have to suffer, as foreign investors can enter and leave [the treasury bill market], and that creates a certain danger," Itar-Tass quoted economic guru and minister without portfolio Yevgeny Yasin as saying from the United States.


Treasury bill yields averaged over 28 percent against rates under 20 before world markets began wavering last month, but many investors think that is too low to justify Russian risk.


Central Bank chairman Sergei Dubinin has said this week will be pivotal as foreigners with maturing contracts to allow them to repatriate profits decide whether to reinvest in Russia.


The Central Bank on Wednesday for the first time announced it was soaking up rubles through a reverse repurchase agreement, a short-term measure which it has used successfully but without fanfare in recent weeks to keep the ruble strong by decreasing supply.


The move had mixed success as the ruble, which had weakened out of the bank's target currency range Tuesday, stumbled just within the range for spot deals, firming to about 5,920 per dollar, but remained outside at 5,924 for Thursday settling deals.


At the same time, the long arm of the bank appeared to support treasury bill prices at the weekly auctions which priced two issues at market levels. The pool of bidders was extremely limited and probably composed of bank allies.


But the Finance Ministry broke previous policy and paid 1.7 trillion rubles ($287 million) of treasury funds to pay off maturing bills, it said, indicating it was unwilling to pay high yields demanded by the market to raise funds.


"We have failed to place the volume necessary for repayment at the auction as the issuer was not satisfied by too low a price offered by some market participants," Deputy Finance Minister Oleg Vyugin said.


The Finance Ministry capped the average yield on the issue at 28 percent -- the current level of the refinancing rate which is viewed by the market as the ceiling for yields -- indicating that it does not want yields or official rates to rise further.


For Russia to be able to fund its budget deficit next year, it must keep interest rates low as well as the ruble strong, but the policies are opposed during waning investor confidence.


Russian banks need dollars to pay foreigners who have bought currency forward contracts to repatriate profits and other obligations, and are ready to sell T-bills to raise cash, putting pressure on bill prices and the rubles as well.


Russia argues economic fundamentals justify the higher stock prices and lower interest rates of last month.


"We are a guiltless victim in this case," Yasin said.


The government is struggling to raise funds to pay off a backlog of wages and pensions, and the weakness in the bond market, coinciding with the postponement of two large oil privatizations, could not have come at a worse time.


But Deputy Prime Minister Oleg Sysuyev said Tuesday that the government was having difficulty meeting its obligations.


Wage arrears have been rising and Sysuyev, as quoted by Itar-Tass said 3.3 trillion rubles ($557 million) of public sector arrears had been paid since July 1, leaving 9.6 trillion to be paid before Jan.1, 1998, a presidential deadline.


Sysuyev said there was little reason to view the deadline with "optimism."