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. Last Updated: 07/27/2016

Wizardry Lifts Ruble From Doom, Gloom

In sprightly contrast to the economic doom and gloom surrounding it, the Russian ruble has been on the up and up this week, a trend that looks set to continue thanks to a fresh piece of administrative wizardry from the Central Bank.

The ruble firmed to 25.41 rubles to the dollar on Friday, a 29-kopek rise from the 25.70 rubles to the dollar it was sitting at at the start of the week.

On Thursday, the Central Bank issued two new regulations, ordering commercial banks to deposit funds equal to the balances of their so-called S-accounts - special ruble accounts used to hold capital operations of foreign investors - with the Moscow Interbank Currency Exchange and lifted controls on daily operations of commercial banks with foreign currencies.

The S-account deposit requirement allowed the Central Bank to build a cushion of foreign exchange reserves as commercial banks rushed to dump foreign currency.

"Placement of deposits equal to S-account balances will take about 15 billion rubles out of the banking system," said Denis Rodionov, fixed-income analyst with Brunswick Warburg investment bank. "It works like an increase in reserve requirements."

Any increase in reserve requirements effectively lowers the money supply, increasing demand for rubles.

Nevertheless, the effect was already being mitigated a day later, as the Central Bank was forced to make heavy dollar sales.

The Central Bank sold some $140 million Friday, the first day this week it had sold dollars on the open market, said Stanislav Korobov, a trader with National Reserve Bank.

By Friday, commercial banks' cash balances at the Central Bank surged to 48.4 billion rubles, up from 44.4 billion rubles Wednesday.

Last week Russia's international reserves contracted to $10.9 billion from $11.1 billion a week ago.

Some banks who had invested the proceeds from their foreign clients' S-accounts in either foreign currency or various loans had to scramble to turn those currency holdings into rubles.

Meanwhile, the Central Bank lifted daily controls on commercial banks' foreign exchange operations. Before this change commercial banks had been forced to either sell more hard currency than they bought or at least balance purchases of currency with sales of currency.

This week's effective tightening of the money supply looks like a pre-emptive strike ahead of expected moves to loosen restrictions on foreign currency trade. The Central Bank plans to lift more restrictions by the end of September in order to comply with requirements laid down by the International Monetary Fund. Such an easing of restrictions will place additional pressure on the ruble.

For much of this year the Central Bank has been caught in a continuous struggle to keep the ruble afloat despite negative expectations and a relatively low level of hard currency reserves.

In fact, the ruble has appreciated in real terms against the dollar - a trend the bank says it expects to see continue.

In an August overview of the foreign exchange market the Central Bank said that ruble devaluation will likely lag growth in the consumer price index due to a combination of Russia's huge trade surplus, the expected success of negotiations with the London Club of creditors and the strong growth in economic activity.

For the year to August the ruble had appreciated in real terms against the dollar by 5.8 percent and by 18 percent against the euro, the Central Bank reported.