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. Last Updated: 07/27/2016

$9Bln Reserves Jump Could Solve a Riddle

The Central Bank's foreign currency and gold reserves leapt a record $9.6 billion in the week ending Jan. 28, their biggest-ever weekly rise, as controversy continued to swirl around a $6 billion loan from Chinese banks to state-owned oil major Rosneft.

The surge sent Central Bank coffers soaring to an all-time high of $128.3 billion, further cementing the nation's stunning oil price-fueled turnaround from the dark days of the August 1998 crisis to a situation where its reserves far outweigh its foreign debt.

"This is a very high figure and is certainly much higher than anyone in the market anticipated," said Philip Poole, emerging markets economist at HSBC Group in London. "The implications are very important for investors looking for protection from shocks."

News of the surge came after Standard & Poor's this week became the last of the three major global ratings agencies to lift Russian debt to investment grade, citing the government's strong current account position and tight fiscal policies.

But the climb came immediately after the biggest two-week drop in reserves since before the 1998 crisis.

The fall, of $5.9 billion over two weeks from $124.6 billion on Jan. 7, sparked widespread speculation that the huge fluctuations could be connected to Rosneft's $9.3 billion acquisition of Yukos' core production unit and its subsequent attraction of a $6 billion loan from China.

"Primarily, the main factor for the hike is probably the receipt of the Chinese loan to Rosneft," said one Moscow-based economist who requested anonymity, citing what he said was the high level of politicization surrounding the loan deal. "This would account for two-thirds of the increase in reserves, and the other one-third is likely due to the Central Bank's operations on the forex market to prevent the ruble from over-appreciating."

The Chinese loan has become a legal hot potato following a Houston court ruling in December barring the sale. The order could lead to sanctions against any participants in the Yugansk takeover, including its financial backers.

On Wednesday, Russian officials rushed to deny any links between the Chinese loan, which is ostensibly prepayment for future oil supplies, and Rosneft's acquisition of Yugansk in December.

China's Foreign Ministry weighed in on Thursday, denying that Beijing had provided any loans for the acquisition of Yugansk and even refusing to confirm if China had offered a $6 billion loan for supplies at all, even though Rosneft, its Russian banking agent Vneshekonombank, and Finance Minister Alexei Kudrin have said this is the case.

"China has not provided any loans to a Russian oil company to purchase any stake in Yuganskneftegaz," Reuters quoted Chinese Foreign Ministry spokesman Kong Quan as saying.

Rosneft was already heavily indebted when it bought shell company Baikal Finance Group, which won the Dec. 19 Yugansk auction. And even though Rosneft said it had made the $9.3 billion payment in full before it took over Yugansk on New Year's Eve, analysts have been puzzled as to where it got the money.

Federal Energy Agency chief Sergei Oganesyan has said Rosneft borrowed from domestic banks. Analysts said the sharp dip in the Central Bank's reserves earlier last month could mean it was somehow involved in financing the transaction.

"There's no other real explanation for why the reserves were down," said Yevgeny Gavrilenkov, chief economist at Troika Dialog. "There were no big payments ... nothing serious was happening on the money market or on the stock market. All these factors show that the transactions for Yugansk were between state institutions."

Without access to the accounts, it is impossible to prove money for Rosneft's purchase came from the Central Bank and was then refinanced by the Chinese, Gavrilenkov said. "You can think up all kinds of schemes that will not affect the economy, as you are moving money from the pocket of one state institution to another. The only evidence of this surfaces in the statistics," he said.

"Nobody can say how this was done, apart from those who carried out the transaction," he said.

One sign that the $6 billion from the Chinese could have gone toward the Yugansk purchase is that ruble liquidity during the week of the reserves surge did not rise, analysts said.

When Vneshtorgbank issued eurobonds worth $400 million early last month, $400 million came into the country and was built into the Central Bank reserves as it printed rubles to buy up the dollars, one expert said, speaking on condition of anonymity. "In this particular transaction, the rubles printed were released into the system and liquidity went up significantly. But in the case of the [later] $9.6 billion reserve hike, the rubles that were printed to absorb the dollar inflow were not released. They could have either stayed with the Central Bank, or gone straight into the budget, or a ministry account."

"The bottom line is that these rubles must have gone into a special account and not into the market," he said. "That's a sign they might have gone toward Yugansk."

"Liquidity stayed the same during the week of Jan. 22-28," confirmed Yaroslav Lissovolik, an economist at United Financial Group.

But confusion and secrecy continued to surround the Chinese loan Thursday. A spokeswoman for Vneshekonombank, Svetlana Nikitina, refused to say whether the Chinese loan had been transferred. The Russian bank confirmed on Wednesday that it had "attracted" the loan, but that does not necessarily mean the funds have been transferred.

With little hard information to go on, other analysts put the reserve hike and the previous drop down to other factors, such as Central Bank intervention on the forex market to prevent excessive fluctuations in the ruble-to-dollar rate. This could have occurred as the dollar strengthened, accounting for the reserve drop, and then as that trend suddenly petered out, accounting for the later reserve hike, they said.

Nina Chebotaryova, financial markets analyst at the Finance Ministry's Economic Expert Group, said the surge could in part be due to an accumulation of funds ahead of a $3.3 billion debt repayment to the IMF at the end of January. Jan. 24-25 saw large dollar trading volumes, almost twice as much as the daily average of between $1.5 billion and $2 billion, she said.