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. Last Updated: 07/27/2016

Ruble Repeats Mysterious Recovery




The ruble mysteriously strengthened Wednesday, rising about 16 percent against the dollar in what analysts said was a repeat of last month's obscure manipulation by banks with debts on currency forwards.


In morning trading on the Moscow Interbank Currency Exchange, the ruble jumped to 13 to the dollar (that is, 1 ruble equals 7.6 cents). This was up from 15.05 rubles to the dollar (1 ruble equals 6.6 cents) Tuesday.


Last month, the ruble staged a similarly miraculous but short-lived recovery, jumping from 20 to the dollar to hit 7.3 to the dollar before collapsing back down to 15.


Analysts at the time said the ruble rate was boosted by the Central Bank to help Russia's private banks, who face huge debts on hard currency forward contracts under which they promised to guarantee foreigners against a depreciation.


These contracts fall due on the 15th of each month with the next due date being Thursday. With the Central Bank's connivance, analysts said, banks push up the exchange rate on these days to reduce the amount they must pay under the contracts.


The exchange rate has been complicated by a new system introduced by the Central Bank last week under which exporters and importers trade in the morning while all other players must trade in a separate afternoon session.


The system is designed to boost the ruble and allow the Central Bank to buy dollars cheaply in the morning session, at which exporters must sell 50 percent of the hard currency earnings.


In Thursday's afternoon session, the ruble also firmed to 14.0 to the dollar from 16.0 previously.


Traders suspect the Central Bank was driving up the ruble Wednesday, but Andrei Cherepanov, head of the Central Bank foreign operations department, denied supporting the ruble. He told Reuters the bank bought more than $10 million at the morning session to prevent the ruble from rising even higher.


However, Mikhail Vasilyev, deputy head of the securities department at Aljba Alliance bank, said it was likely that on Wednesday, ahead of the the forwards settlement, the Central Bank did not buy dollars at the morning session. Since demand for dollars from importers has fallen, the Central Bank's absence from the market made the ruble shoot up.


"The Central Bank did not bid for dollars on purpose," said a trader with a large Western bank who preferred not to be named, adding that the ruble was likely to climb higher on Thursday.Analysts said the Central Bank was repeating the tricks it used ahead of last month's settlement of forward contracts.


"We have seen this scenario play out before, where the foreign exchange rate strengthened mysteriously in the immediate runup to the midmonth forwards settlement date," said Arnab Das, emerging markets strategist at J.P. Morgan investment bank.


The burden of paying off tens of billions of dollars in forward contracts is believed to be enough to bankrupt many of Russia's biggest banks.


The Russian government has asked Western bankers to include these debts in negotiations on restructuring the state treasury bill debt, on which it defaulted Aug. 17.


Analysts said the ruble exchange rate question was pivotal for both the forward and the treasury bill negotiations. "Somehow, ultimately, the rate will become part of the bargaining between the creditors and the Central Bank," said Peter Boone, co-head of research at Brunswick Warburg.


According to Vasilyev, the rate controversy is already the main stumbling block at the talks.


Bankers were divided on whether the rate the Russian government is going to offer would be acceptable for foreign investors.


The ruble is not likely to rise to last month's high, but could easily reach 10 to the dollar Thursday, Vasilyev of Alba Alliance said. It should drop back down soon thereafter.


Finance Minister Mikhail Zadornov said Wednesday his agency would calculate the 1999 budget based on a rate of between 17 and 19 to the dollar, according to Interfax.


The forward contracts, which foreign players on the Russian market used to hedge their investments in government bonds, fall under the Aug. 17 moratorium on payment of debts to foreign entities.


Some Russian banks used the moratorium as an excuse for not paying their debts when the last forward contracts matured on Sept 15. But analysts have said there are ways to sidestep the moratorium for those willing to settle their debts.


One Russian bank has already been sued by its Western creditors for using an artificially high exchange rate in repaying forward contracts.


Last week, Deutsche Bank's investment branch Morgan Grenfell sued a Paris-based bank controlled by the Russian Central Bank for more than $30 million in a dispute over exchange rates stemming from the suspension of foreign exchange quotations on the Moscow market in August, according to Reuters.


Morgan Grenfell filed a suit against Banque Commerciale pour L'Europe du Nord f Eurobank, claiming it had used an unfair ruble rate in repaying debts on five forward contracts.


Deutsche Bank claimed it should be paid according to the rate set by the Emerging Markets Association of the Chicago Mercantile Exchange on Sept. 18, almost 20 rubles to the dollar, while Eurobank insists it was justified in paying at 7.86 rubles to the dollar, the last rate set on the MICEX before trade was suspended indefinitely in late August.


Deutsche Bank leads the group of foreign banks negotiating the debt restructuring scheme with Russia.