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. Last Updated: 07/27/2016

Ruble Rally Continues as Economists Urge Caution

MOSCOW — The ruble firmed further on Wednesday, prompting the central bank to buy between $1.5 billion to $2 billion to moderate the currency's appreciation, dealers said, as economists begin to worry that the rally is becoming a bubble.

The ruble closed at 36.03 against the euro-dollar basket that the Central Bank uses to guide its foreign exchange policy, suggesting that the regulator shifted the level of interventions at which it buys foreign currency several times during the day, dealers said. On Tuesday, the ruble closed at 36.17.

The central bank has administered a series of such moves over the past couple of weeks, widening the interventions corridor for each $700 million in purchases.

The ruble firmed to 29.77 against the dollar from Tuesday's close at 29.83 as the U.S. currency remains on the defensive globally, with market players increasingly willing to take greater risks on currencies that promise greater returns.

In addition to the weak dollar, relatively high oil prices support the ruble's rise, if only for now, economists said.

Crude prices — a major indicator of Russia's overall economic well-being — traded near $70 a barrel on Wednesday.

"We see some kind of a bubble," said Vladimir Osakovsky, head of research strategy at UniCredit Bank in Moscow. "If the optimism in global recovery fades and oil prices fall, there might be a sharp reversal of the rally."

The ruble's recent appreciation is a sharp switch for a currency that, at the beginning of the year, was ditched hurriedly by investors and Russians alike as the economy slipped into its first recession in a decade.

The ruble lost a third of its value during the winter's gradual devaluation, which was carefully managed by the Central Bank at a cost to its reserves of $200 billion.

With crude prices rising to relatively high levels in recent months and emerging markets leading the global economic recovery, investors' willingness to take on higher risks for higher returns has increased significantly.

The Central Bank's benchmark refinancing rate, at an annual 10 percent, offers lucrative carry trade returns, compared to one percent or less in other G8 economies.

"Compared with other emerging markets, Russia still has a large class of assets for sale," said Viktor Kholoshnoi, a dealer with Moscow's Gazprombank. "This is not stable. It's not likely that the ruble's appreciation is long-term."

The Central Bank is meandering between two objectives: a wish to move to a more flexible exchange regime in the coming years and the pressure to keep the currency from strengthening too much, UniCredit's Osakovsky said.

A strong ruble works to the disadvantage of local producers, who cannot compete with cheaper imports.

Prime Minister Vladimir Putin has said the government's priority is the quality, not the speed, of economic recovery and that officials will not allow the ruble to appreciate significantly.

Alexander Murychev, deputy head of the Russian Union of Industrialists and Entrepreneurs, said on Wednesday that he believes that the ruble's rate will stabilize in the next few days.

"I'm not worried," Murychev said. "I see this as a temporary trend brought on by the weakening. I don't believe there will be much volatility in the ruble's rate."

He added that the ruble should oscillate close to 30.00 per dollar for the time being.

Local dealers have said they believe that the ruble will remain at about the 36.00 level against the basket for the rest of the week, with the Central Bank likely to intervene to defend that level and prevent further strengthening.