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. Last Updated: 07/27/2016

MICEX Hits Record After Yukos Auction

Volumes of ruble/dollar trade on MICEX hit a record $11.2 billion Friday, a day after Rosneft bought the east Siberian assets of bankrupt oil company Yukos.

Traders and analysts said the heavy dollar selling could be linked to the auction winner trying to convert funds into rubles.

"The sell-off took place because of the Yukos auctions," Raiffeisen bank currency dealer Sergei Shchepilov said.

The previous record of $9 billion on April 12 was also linked to Yukos assets auctions. Yukos' total debt stands at over $26 billion, and the state has already received over half of this amount from auctions of its assets.

The ruble was stable against the twin currency basket -- comprising 55 U.S. cents and 45 euro cents -- used by the Central Bank to guide its managed float of the currency.

The last time the bank allowed the ruble to appreciate was on Feb. 8, when it rose by 0.5 percent against the basket.

Rosneft, the state firm that won the auction Thursday with a bid of 175.7 billion rubles ($6.83 billion), has two weeks to pay the cash. The dollar selloff came as a surprise for markets, which expected currency trade volumes to rise only in mid-May.

Sharp increases in ruble/dollar trade have in recent months often preceded revaluations of the basket. The central bank allows the ruble to appreciate against the basket in small moves in order to curb inflation.

A stronger ruble makes imported goods cheaper but also turns Russia into a magnet for speculators betting on further appreciation. The lifting of currency restrictions in 2006 made it easier for speculators to buy ruble assets.

The main risk of Russia missing its annual inflation target of 8.0 percent in 2007 comes from accelerating private capital inflows as Russian companies raise money abroad to finance their expansion.

The Central Bank estimated net private capital inflows at $13 billion in the first quarter of 2007 and said the capital inflow has not abated in the second quarter. The country's gold and forex reserves hit a record $369 billion last week.

Rosneft agreed to borrow a total of $22 billion from eight Western banks to buy Yukos assets. Traders and analysts said a recent strengthening of the dollar could have triggered the sell-off.

The dollar rose to a 2 1/2-week high against a basket of currencies Friday after data showed that the U.S. services sector had expanded at a faster pace than expected. The dollar rose 0.2 percent against the ruble Friday.

Analysts said M2 money supply growth at rates over 50 percent will continue to drive up consumer prices and may prompt the Central Bank to allow the ruble to appreciate further against the basket.

A 650 billion ruble ($25 billion) spending plan announced by President Vladimir Putin last month is likely to contribute to inflationary pressures. The state will partly finance the spending spree with proceeds of the Yukos auctions.

Central Bank chief Sergei Ignatyev told Putin on Thursday that the country would still achieve its 8 percent inflation target but that April inflation looked set to exceed the last year's level and annualized inflation has started to rise again.

"If April inflation comes at 0.8 percent, they will have to work really hard to hit their target," said Yevgeny Nadorshin, an analyst at Trust Bank.

The official inflation data for April is due for release this week.