Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Central Bank Devalues Ruble Twice in a Week

ReutersA man walking by a Moscow currency exchange bureau Friday. The ruble was devalued for the third time in a month.
The Central Bank on Friday allowed the ruble to depreciate for the second time in a week and said it would raise key interest rates in an effort to reduce capital outflows.

The trading corridor of the dollar-euro basket was widened by 1 percentage point, or 30 kopeks, for the third time this month, continuing on a track of gradual devaluation widely criticized for encouraging currency speculation and depleting the country's foreign currency reserves.

"The Central Bank today widened the technical corridor for supporting the exchange rate by 30 kopeks on both sides, just like the last two times," Central Bank vice chairman Alexei Ulyukayev said Friday, RIA-Novosti reported.

The bank also raised its key interest rates on Friday, increasing its refinancing rate to 13 percent from 12 percent starting Monday.

"Our goal [for the interest rate hike] is to destimulate capital outflows. If a devaluation is expected, then the bigger the differential between our interest rates and world base rates, the greater the reason for banks and their clients not to move into foreign currency assets," Ulyukayev said.

Raising interest rates in a tight liquidity situation, however, could put additional strain on the economy at a time when a weak ruble continues to drive people to buy foreign currency.

"This is a highly risky strategy as banks continue to experience deposit outflows and, therefore, ruble liquidity is very tight," said Elina Rybakova, chief economist at Citibank.

In a note to investors Friday, VTB economist Alexandra Yevtifyeva said the interest rate hike "will be quite painful for banks."

"We think that the banks will pass the hike on to deposits and eventually to lending rates, thus tightening credit in the economy and worsening growth prospects for next year," Yevtifyeva said.

The government is not limiting itself to interest-rate hikes in its quest to slow capital outflows, however.

In a further step, commercial banks will now be allowed to open euro and dollar accounts with the Central Bank, the bank said Friday.

Starting Monday, firms eligible to receive collateral-free loans from the Central Bank could open a foreign-currency correspondent account, a statement on the bank's web site said.

The country has seen more than $190 billion leave the country since August, according to BNP Paribas estimates, and the ruble has lost more than 20 percent of its value against the dollar since July, driven largely by plummeting oil prices, which have seen Russia's Urals blend crude fall 65 percent over the same period.

Critics say, however, that the bit-by-bit approach to devaluing the ruble maintains pressure on the currency while forcing the Central Bank to fork out billions of dollars from its foreign currency reserves to prop up the exchange rate.

Ronald Smith, chief strategist at Alfa-Bank, said the downside of a gradual devaluation is that it keeps pressure on the ruble but added that it also "gives the population time to adjust to the idea."

"However, the government cannot keep on spending $15 billion a week — the recent average — to support the currency indefinitely," Smith said in an e-mailed message.

"Various market indicators point to a 20 percent to 25 percent decline versus the dollar in the coming months unless there is a sudden increase in commodity prices," he said.

Ulyukayev defended the the gradual devaluation, however, dismissing concerns about the depletion of the reserves and reiterating that the government's primary goal is to insulate the Russian economy.

"We're not going to make any sharp changes," Ulyukayev said. "This is what the reserves are there for — to mitigate the effects of the dynamics currently unfolding on the global financial markets … so that the fundamental factors don't have as harsh an effect on Russian companies and the domestic economy."

The country's foreign reserves, which stood at about $475 billion on Nov. 7, have fallen by $122.7 billion since early August.

Rybakova, of Citibank, welcomed the devaluation as "a very positive sign" because the government is allowing the ruble to adjust in line with a change in underlying economic fundamentals.

"The terms of trade have turned sharply against Russia," Rybakova said. "Commodity prices have come down on average by 40 percent and oil prices by over 65 percent since their peak in mid-2008."

Rybakova predicted that the Central Bank would continue to widen the trading corridor by up to 5 percent, adding that the ruble is still overvalued by 15 percent to 20 percent.

Market players and exporters who stand to gain more from a weaker ruble are urging for a complete free-float of the currency.

Viktor Vekselberg, a main shareholder of TNK-BP, told reporters Friday that a weaker ruble would help business.

"The government's priority is budget stability, but for business the ruble policy is more important," Vekselberg said, Bloomberg reported.