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. Last Updated: 07/27/2016

Ruble Appreciation Seen Unlikely in '07

The Central Bank is unlikely to allow the ruble to appreciate further in 2007 because it wants to shield domestic industries from the strong currency's negative impact, a senior central banker said Monday.

The bank has allowed the ruble to appreciate by about 1.5 percent against the currency basket, comprising 55 cents and 45 euro cents, so far in 2007 as it seeks to curb inflation that threatens to overshoot the annual target of 8 percent.

"It is very unlikely that the [Central Bank] will allow further strengthening of the ruble against the dual currency basket before the end of 2007," First Deputy Chairman Alexei Ulyukayev told reporters.

The bank uses the basket to guide the ruble's managed float and last allowed the ruble to strengthen by about 0.6 percent last week. The measure affects price growth with a lag and was one of the last windows of opportunity for the bank this year.

Ulyukayev said the bank would refrain from further ruble appreciation, its only effective tool against inflation, in order to protect domestic producers, which are suffering losses because of the strong currency.

"The appreciation that has already taken place is in line with targets we gave to the Russian producers," Ulyukayev said. Last year, a powerful lobby of industrialists appealed to President Vladimir Putin to stop the appreciation.

The Central Bank says it has analytical data suggesting 1 percentage point of ruble appreciation results in 0.3 percentage point lower inflation. Many analysts disagree.

"I can only welcome today's statement. The ruble appreciation as an anti-inflation measure does not make sense," said Anton Stroutchenevski from investment bank Troika Dialog.

Ulyukayev also pointed to a rapidly shrinking current account surplus, the main source of foreign currency in the country, as imports are catching up with exports and said he did not rule out the ruble weakening against the basket in the medium term.

Ulyukayev also said any weakening would be gradual and tightly controlled. The Central Bank runs the world's third-largest currency reserves, enabling it to withstand speculative attacks on the ruble.

"Having such significant currency reserves, we will not allow a rapid weakening. We must be careful in order not to allow sharp fluctuations," Ulyukayev said.

Consumer prices spiked in recent months as a result of a liquidity wave on the back of high oil prices and record net private capital inflows. Inflation ran at 0.9 percent month on month in July compared with 1 percent in June.

In a separate move Monday, the Central Bank used another anti-inflationary tool and raised its short-term deposit rates by one-quarter percentage point to mop up excess liquidity from the market.

"This measure will allow us to tie up a significant amount of liquidity -- tens of billions of rubles," Ulyukayev said.

Analysts said the Central Bank chose perfect timing for both the ruble appreciation and the interest-rate hike since the measures would not result in increased capital inflows due to jitters on global financial markets.

"The global environment has changed and the Central Bank took advantage of it," said Yaroslav Lissovolik, analyst at Deutsche UFG.