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. Last Updated: 07/27/2016

Ruble Rally May Be Heading For Finishing Line

The ruble may be coming to the finishing line of its oil-fuelled rally as interest rate cuts bite, trade and current account surpluses narrow and the Central Bank retains the scope to step up interventions.

An end to the ruble's rise will placate domestic producers squeezed out by cheap imports and will limit the amount of foreign currency Russia must spend from its oil wealth funds to cover a ruble budget deficit. It could also make Russia more attractive to long-term foreign investors, whom it is courting.

"A weak ruble is in the interest of the government ... as it can attract real investment. A cheap currency is a good opportunity to enter the market at a low price," said Stanislav Ponomarenko, head of Russia research at ING. For speculators though, a turnaround in the ruble could be a lesson not to play against the Central Bank, even if it has started to allow the currency greater room for maneuver.

Since September, the ruble is up 11 percent at 28.72 per dollar, fanned by one-year peaks in the price of Russia's oil exports and matching the move in the free-floating, commodity-driven Australian dollar.

Other emerging economies have shielded their currencies from dollar strength via tight bands like Kazakhstan or China, or tried to curb capital inflows with taxes like Brazil.

In contrast, the Central Bank has so far only intervened to slow down the ruble rally rather than trying to stop it.

But with October data underscoring the fragility of Russia's recovery from recession, the ruble may be nearing the limit of how far it is able, or even allowed, to appreciate, even if a prolonged fall of the oil-focused currency is unlikely.

"I no longer see a big potential for the ruble to appreciate from current levels," said Maxim Oreshkin, head of research at Rosbank, adding that the real effective exchange rate is already approaching precrisis levels.

Consensus forecasts from analysts and nondeliverable forwards, a barometer of market sentiment, also show the ruble weakening gradually over the next 12 months to 30.01 and 30.48 respectively.

Rising imports and a flood of people abroad for the long public New Year's holiday are likely to dent surpluses. Some cash from the seasonal boom in budget spending could also find its way into capital outflows.

Russian stocks more than doubled in value in 2009, and with the expected year-end profit-taking approaching, investors may be reluctant to take fresh bets on Russian assets.

Russian companies and banks will need to change rubles into hard currency to repay more than $19 billion in December, $9 billion more than in other months, said Alexander Morozov, chief economist for Russia and the CIS at HSBC.

"There will be some residue that will cause a change in demand and supply dynamics of the ruble," he said.

The Central Bank can also put the brakes on the rally by adding to the 350 basis points in refinancing rate cuts made since April, a policy which both helps revive the economy and reduces the ruble's yield appeal.

"The Central Bank will have to cut by some 200 basis points in order to reduce the speculative pressure on the ruble," said ING's Ponomarenko.

At 9.5 percent, the refinacing rate remains far above rates of 1 percent or less in the other Group of Eight major economies, although investors do require a premium for entering emerging markets.

The regulator can also crank up its market presence from today's policy of letting the ruble strengthen 5 kopeks versus a dollar-euro basket for each $700 million of interventions.

Ponomarenko at ING said interventions at each step could be increased to as much as $1.5 billion, meaning that "the appreciation ... will go at a slower pace, the market will understand that the Central Bank is prepared to get involved."

Any move down in the ruble could be sharp if oil price trends are reversed. "We can go 10 percent quite quickly," said Rosbank's Oreshkin. "The risks are high."

On the reverse, if oil were to unexpectedly jump to, for example, $100 a barrel, the ruble rally could restart anew.

In the long term, Russia has pledged to move to targeting inflation and letting the ruble float freely by 2012. But even then, it will not give up the right to intervene when necessary.

"We do not promise to never participate in the currency market," the Central Bank's first deputy chairman Alexei Ulyukayev said recently. "Most likely, [it] will be a so-called dirty float. ... We will mostly not interfere, but sometimes we will."