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. Last Updated: 07/27/2016

Ruble Hits Low as Central Bank Lets It Float




The battered ruble dropped to a fresh low against the U.S. dollar Tuesday as commercial banks unloaded rubles and the Central Bank announced that it would let the currency float indefinitely.


The bank set the official ruble rate for Wednesday at 25.9 rubles to the dollar, 1.58 percent down from Tuesday and a drop of almost 1 ruble from last Thursday.


Turnover in unified trade at the Moscow Interbank Currency Exchange was a mere $135.5 million, about half of the highs seen last month. The Central Bank uses the average trade rate to fix the official ruble rate.


The ruble has been steadily sliding since Friday, when commercial banks began a drive to swap excess rubles for dollars, and could easily fall below 27 yet this year, analysts said.


The ruble's drop Tuesday came in the wake of a Central Bank policy statement late Monday that it was going to let the ruble float next year. The Central Bank's draft monetary and credit policy for 2000, which has been submitted to the lower house of parliament, states that under the current situation, the "policy of a floating currency rate" is "a preferred policy" that would create favorable conditions for the accumulation of gold and foreign currency reserves, Interfax reported.


The Central Bank said that maintaining a fixed foreign exchange rate "may prove too expensive given the comparatively small size of the official gold and foreign currency reserves."


Economists said Tuesday that the Central Bank's admission that forex reserves were too low to support the ruble, combined with an upsurge in excess rubles on the balance sheets of commercial banks, was putting the pressure on the ruble.


"The Central Bank's statement definitely had a psychological effect on the market. It lowered expectations," said Peter Westin, an economist at the Russian European Center for Economic Policy.


"It was a recognition by the Central Bank that the significant excessive liquidity in the banking system and the fall in reserve size makes supporting the ruble no longer viable," said Roland Nash, an economist at Moscow investment bank Renaissance Capital.


Ruble reserves on the books of Russian commercial banks have been mounting this week. Renaissance Capital reported that the balance of commercial banks with the Central Bank stood Monday at 59.81 billion rubles, up from 55.23 billion Friday.


Analysts said the surge in ruble sales is part of a market bounce back after the ruble strengthened against the dollar at the end of September. At that time, corporations and banks fought to sell dollars to put their financial house in order for third quarter auditing. Now that the fourth quarter has begun, banks are starting to sell off those rubles.


"The exchange markets are just undergoing a gyration effect as commercial banks seek to get rid of surplus rubles," said Vladimir Konavalov, an economist at CS First Boston.


But fears surrounding falling Central Bank reserves may mean that the ruble drop is more than a market gyration, Westin said.


"The ruble could now fall beyond the 27 to the dollar predicted for the end of this year," he said.


Reserves have come under pressure from previous Central Bank interventions on the currency markets and paying off foreign debt, Nash said.


The official amount of reserves available to defend the ruble has also dropped sharply following International Monetary Fund demands that the Central Bank recalculates its reserves to exclude holdings in its foreign subsidiaries.


The official reserve figure, which stood at $10.9 billion on Sept. 24, has already dropped by around $1 billion due to the reassessment, Deputy Finance Minister Oleg Vyugin said Tuesday, Reuters reported.


He said there was still about $250 million remaining to be factored out.


"There has also been some evidence that the Central Bank has been selling rubles for dollars in recent days to replenish its reserves," Nash said.


Russia must pay off around $850 million to the IMF in October and November.