Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Officials Lash Out As Ruble Passes 25

As the official ruble rate slipped below 25 to the dollar for the first time Monday, a rattled Central Bank moved to punish banks selling dollars on the side and quash one impromptu Moscow exchange they were using.

The Central Bank's official exchange rate sank to 25.11 to the dollar, 1.12 percent down from the official rate of 24.83 set after Friday's trading. Already just since the beginning of the year, the ruble has lost 22 percent of its value.

And if in the past the Central Bank could have entered the market by selling dollars, these days it lacks those dollars. Tens of millions of dollars have been evaporating from the bank's vaults each week. Central Bank chief Viktor Gerashchenko says reserves will shrink as low as $10 billion by the end of the month, of which about $4 billion is in gold, and about $2.7 billion is already earmarked to pay off debts to the International Monetary Fund, the World Bank and Eurobond holders by mid-summer.

"With reserves so low, the Central Bank ... can only use administrative restrictions to prop up the ruble," said Dmitry Piskulov, vice president of Toribank.

But as in the Soviet era - when restrictions on trading rubles for dollars merely fostered a national black-market trade, where street-corner sharps offered favorable rates - the devil is in the enforcement. Already there are cracks appearing in the walls of the Central Bank's fortress of new rules and regulations meant to slow down dollar trading.

Consider the Central Bank's furious response to an April Fool's joke last week involving the Russian Trading System, or RTS, which handles the biggest volume of Russian over-the-counter equities trades.

On April 1, someone from RTS decided to issue a press release saying the stock exchange would soon kick off ruble/dollar trading as well.

The Central Bank was not amused. RTS immediately received an inquiry and explained that the announcement was a joke, but the Bank nevertheless later issued a statement saying that RTS would not be allowed to turn itself into a currency floor.

Currency trading today is confined to MICEX, the Moscow Interbank Currency Exchange, where the Central Bank keeps a chokehold on affairs.

In the wake of the August-September ruble collapse - when the currency lost more than 60 percent of its value in a matter of weeks - the Central Bank actually shut down currency trading.

It then revived it, in something of a straitjacket: Exporters and importers, or banks representing them, must sell and buy their currency at separate morning and afternoon trading sessions on MICEX.

By tightly regulating when dollars are bought and sold, the Central Bank has been able to slow - but not stop - the slide in the ruble.

The Central Bank is forever trying to force the MICEX system to keep functioning, even as rates offered in the morning differ more and more widely from those in the evening.

For example, the gap between morning and afternoon sessions was at 5.8 percent on Friday - a difference that reflects how widely the appetite for dollars differs from the rate the Bank wants to see set. By Monday the Central Bank was forced to let the ruble drop in the morning session, narrowing that spread to a still not-unsubstantial 3.7 percent.

To keep everyone cowed and in line, the Bank recently closed off access to MICEX for nine unnamed banks. And on Monday it announced threateningly that it would intensify a campaign of "thorough checks" into commercial banks that have been large buyers of hard currency - apparently to make certain they were buying dollars on behalf of "importers" and not for their own use.

Monday the Central Bank also moved to stomp on the Moscow Stock Exchange and ING Barings over a tiny semi-formal currency market that sprung up about two weeks ago on the MSE as a user-friendly alternative to MICEX.

The trading system that the Central Bank finds so threatening turns over an average of $1.5 million a day - a miniscule amount when set beside the $100 million or so that regularly changes hands at MICEX.

Banks use the stock exchange's trading terminals - which aren't trading much stock these days anyway - to exchange offers for dollars. The MSE charges no commission and plays no role in the settlements procedure. Settlements are decided on by the banks and then routed through ING Barings, said Alexei Mamontov, first vice president of the Moscow Stock Exchange.

"The exchange does not conduct settlements itself," said Mamontov. "Banks open accounts with ING Barings, which simply transfers money from one account to another."

The exchange has also started to publish its ruble/dollar exchange rate, and though it has so far differed only slightly from the Central Bank rate, the mere specter of an alternative to MICEX has alarmed the Central Bank.

The Central Bank said Monday that it was considering taking unspecified "measures" against ING Barings. ING Barings declined to comment.

Mamontov of the MSE disputed the Central Bank's position that exchanges like MSE or even RTS have no right to trade in currencies.

"Formally, the Central Bank cannot punish us because it did not issue any license to us," said Mamontov. "This type of activity does not require any license."

The Central Bank can still use its supervisory powers over banks to scare them away from currency trading at the Moscow Stock Exchange. But Mamontov said that it would simply succeed in driving them further underground. MICEX already accounts for a mere 10 percent of so-called "speculative" foreign currency trades, he estimated.

A debt forgiveness deal from the IMF could go a long way toward freeing up Central Bank dollars for reinforcing the ruble. But so far the IMF and the Yevgeny Primakov's Cabinet have only vaguely agreed that some sort of deal is desirable. An IMF mission is due to arrive Wednesday, and Cabinet officials say they expect a deal by week's end, assuming the talks are not chilled by Russia's support of Yugoslavia.

Until then, barring a jump in world oil prices - and with it a jump in dollars pouring into Russia from foreign oil sales - the ruble is likely to keep weakening.

"My guess is that dollar will gain another 1.5 to 2 rubles by the end of April and that the exchange rate will be close to 27 rubles to the dollar by then," said Peter Westin, an economist with the Russian-European Centre for Economic Policies.