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. Last Updated: 07/27/2016

State May Let Ruble Fall After Loan Deal




After spending an estimated $100 million a week during July to prop up the ruble, the Central Bank is expected to stop defending the currency and let it slowly slither back down now that the IMF has agreed to resume lending to Russia.


In the week to July 23, Russia's hard currency reserves dived $500 million to stand at $11 billion, their lowest level since April, the Central Bank reported Thursday. The reserves had peaked in June at $12.15 billion and slumped to $11.5 billion as of mid-July.


"Looking at the schedule of foreign debt payments and the decrease of international reserves, one can see that the Central Bankdisbursed some $250 to $300 million during July for ruble support," said Konstantin Chernyshov, head of research with NIKoil brokerage.


The Central Bank has actually spent more than is apparent from the decline in reserves, because Russia's current-account surplus would normally lead to a rise in the reserves.


In fact, the bank has paid out this month an estimated $1.3 billion on debt servicing, $800 million of that going to the International Monetary Fund. A further $300 million went to defending the ruble, economists said.


The rapid withering away of Russia's reserves made many local economists jittery.


"It is especially bad given that Russia has a large current-account surplus," said Vladimir Konovalov, an economist with CS First Boston.


Analysts expect the ruble to soften gradually in the coming weeks.


But nothing dramatic is expected in August, even though Russia's exports usually go through a seasonal decline at that time of the year.


"The ruble could soften to 24.5 per dollar, but I can hardly see it hitting the level of 25," said Dmitry Dorukhin, a currency trader with Moscow Business World Bank.


Dorukhin said the Central Bank had definitely intervened to sell down the dollar in recent weeks, but that its weapons of choice remained the numerous and potent administrative tools it has built up to direct market operations.


The demand for dollars has mostly been generated by banks' desire for a speculative instrument in which to invest the tens of billions of rubles they have sloshing around in their correspondent accounts at the Central Bank, analysts said.


A dramatic slump is only likely if the Central Bank sticks to its recent policy of pegging the ruble to the dollar in defiance of market logic, said Andrei Ivanov, banking analyst with Troika Dialog ."The longer the Central Bank props the ruble, the faster the slide will be when controls are loosened," he said.


The ruble has appreciated against the dollar in real terms since the beginning of this year.


The currency has dipped alarmingly on several occasions - most recently when former Prime Minister Yevgeny Primakov was sacked May 12 - but it has been remarkably stable for the past two months or more.


While Russia's currency has lost about 20 percent of its value against the dollar - moving from 20.6 on Jan. 1 to Thursday's rate of 24.21 - consumer prices are up some 30 percent since then, meaning that the dollar's purchasing power, its real value, has moved down by a significant amount.


"The ruble has appreciated 7 percent in real terms against dollar from year start," said Chernyshov at NIKoil. "Given that at the same time the dollar gained against currencies of the euro zone, which remain Russia's major trading partners, the situation is even further away from equilibrium than might be at first apparent."


"I do not see any economic logic in operating a fixed exchange rate policy, it must be due to some kind of political decision," he added.


However, it is almost impossible to predict which way the Central Bank will lurch in the coming weeks, said Parvoleta Shtereva, fixed income and currency strategist at MFK Renaissance investment bank.


"It's a mystery to me what [the Central Bank] is doing. We see some kind of socialist model forming here with foreign exchange and capital controls, controls over crude oil exports and prices," Shtereva said.


"Since there is no capital inflow, the government must be looking to commodity exporters to finance the elections and might try to keep the ruble stable to buy dollars from them at lower rates," she added.


Should the Central Bank allow the ruble to gradually decline to a more sensible rate, it would be acting in the wider economy's best interests, economists said.


"The major exporting industries suffer in such a [high exchange rate] environment, while only telecommunication companies, the power and automobile industries benefit from an appreciating ruble," Chernyshev said.


The recent drop in the level of Russia's hard currency reserves is likely to be reversed now that the IMF has agreed to start lending to Russia again, freeing the Central Bank from the need to spend the reserves to pay off the nation's foreign debts.


In August, Russia is slated to pay $520 million to the IMF and another $180 million to the World Bank.