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. Last Updated: 07/27/2016

Duma to CB: Show Us the Money

What is the Central Bank doing with the government's dollars?

Paying off foreign debt? Defending the ruble? Shifting cash to other accounts? Nobody seems to know for sure, and the Central Bank offered a vague explanation as to why. After reaching an all-time high of $38.8 billion Oct. 26, reserves have fallen $2.6 billion, mostly in the last two weeks -- the largest fall since the dicey days before the 1998 default and devaluation.

On Thursday, the day the Central Bank makes its weekly announcement on reserve levels for the end of the previous week, it pleasantly surprised the market with news that reserves were up $100 million. It also said the overall drop since Oct. 26 was a result of falling oil prices and external debt payments along with traditional year-end factors.

Reserves $ Billion

Dec. 1436.2
Dec. 736.1
Nov. 3037.3
Nov. 2338.6
Nov. 1638.3
Nov. 938.5
Nov. 238.5
Oct. 2638.8
Source: Central Bank

But that didn't satisfy the State Duma, which sent a special request to Central Bank Chairman Viktor Gerashchenko asking him to provide daily reserve data, amounts and dates of debt payments and the size of daily interventions on the currency market.

Lawmakers may have to wait for an answer. A source close to the Central Bank said Gerashchenko has been on vacation for the last week and will probably stay at his dacha until early January, adding to the confusion.

"What we see now is a result of the inconsistent and destabilizing policy of the Central Bank," said Alexei Moiseyev, an economist with investment bank Renaissance Capital. "The Central Bank continues to surprise the market," he said.

The drop in reserves was accompanied by a steady decline in the ruble, which has lost more than 30 kopeks in the past two weeks, hitting 30.25 to the dollar at the unified session of eight exchanges Thursday and slightly off Monday's all-time low of 30.30.

Some currency traders said the Central Bank has been spending as much as $100 million a day recently to prop up the ruble, but most analysts think the number is much lower and cannot explain the overall decline in reserves.

"We are confident that the decline ... was not solely related to intervention aimed at supporting the ruble," Troika Dialog wrote in a report this week.

"I doubt the bank spent considerable money to support the ruble [in the last few weeks], it was hardly more than $300 million," said Troika's chief economist, Oleg Vyugin.

Troika offered a different explanation. Vyugin wrote in a research note that market sources said the Central Bank, for some unexplained reason, deposited $750 million in Vneshtorgbank at the beginning of the month.

"Whatever the aim of this transaction was, this amount has to be subtracted from currency reserves," Vyugin said.

At NIKoil, the view was different. The brokerage's chief strategist, Eric Kraus, said the drop "was due to some sort of accountancy operation, either prepayment of debt, transfer to a paying account or restatement."

Alfa Bank analyst Natalya Orlova went further, saying that the Central Bank made an early repayment of $2.7 billion to the International Monetary Fund and bought back up to $2 billion worth of MinFin-4 treasury bonds.

The IMF confirmed Thursday that the Central Bank had paid $2.4 billion in the fourth quarter, most of which was paid ahead of schedule, but declined to comment on Alfa's statement.

Whatever the real reason for the shrinking reserves, most analysts agree on two things: The bank should not try to defend the ruble; and at least some transparency of the Central Bank's operations would be welcome.

Analysts still remember December 1999, when the Central Bank spent some $400 million -- 3 percent of its total reserves at the time -- to keep Gerashchenko's word that the ruble would not fall past 27.7 to the dollar before the end of the year. He kept his word, but the ruble plunged to 28.6 in the first week of 2000.

As for what level reserves will be next Thursday, analysts, predictably, are divided. Moiseyev said they will shrink by a billion. Vyugin said they will rise, but not substantially. And Kraus said they will not change.