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. Last Updated: 07/27/2016

Central Bank Policy Exacerbates Ruble's Fall

The Central Bank is exacerbating the ruble's 35 percent plunge since August, even as it struggles to defend the exchange rate, by providing loans to banks that speculate on the currency, Alfa Bank and UniCredit said.

The Central Bank lent 7.7 trillion rubles ($214 billion) in overnight and seven-day loans secured with bonds or other collateral in the 16 trading days last month, about double the 4.8 trillion rubles provided in so-called repurchase auctions in December, Central Bank data show. The ruble lost 18 percent against the dollar in January. It weakened briefly on Thursday beyond the lower limit that the Central Bank said it would defend.

"A significant amount, if not all, of the speculative attacks on the ruble are funded by the Central Bank itself," said Vladimir Osakovsky, an economist for UniCredit.

Prime Minister Vladimir Putin praised the "gradual devaluation" policy in an interview last month, saying it avoided a repeat of the financial crisis a decade ago.

Policymakers are trying to stop speculators from driving down the currency, which makes it more expensive for borrowers to pay back debt and fuels inflation, at the same time seeking to hold down interest rates to keep the economy from contracting. The inflation rate rose in January for the first time in five months to an annualized 13.4 percent as the weakening ruble pushed up the cost of imports.

The ruble slid to as low as 41.0181 against a target basket of dollars and euros. Central Bank Chairman Sergei Ignatyev pledged Jan. 22 to continue using reserves to hold the ruble at 41 and said he would limit the amount of refinancing offered and adjust interest rates.

The Central Bank won't need to "spill a lot of blood" to defend the exchange rate, said Sergei Shvetsov, director of the bank's financial operations department. Reserves rose by $1.6 billion last week, the first gain in three weeks.

While the Central Bank raised borrowing costs on short-term financing for the third time since November on Feb. 2 and limited traders' ability to bet on the exchange rate, the efforts aren't enough to slow demand, said Natalya Orlova, chief economist at Alfa Bank. Policymakers lifted the rate on overnight and seven-day loans obtained through the auctions by 1 percentage point to 11 percent this week, the highest since at least November 2007, data on the Central Bank's web site show.

Banks used "almost all" the money from loan auctions to bet against the ruble, Orlova said.

"If they really wanted to stop speculation, they have to raise the rates significantly, say to 20 or 30 percent, for a short period of time," said Yevgeny Gavrilenkov, chief economist Troika Dialog. "One day they have to say: Give me my money back, no more repo is available."

The largest banks in Russia have been speculating, said Anton Petkin, head of trading in Moscow for UBS, Switzerland's biggest bank. Petkin said his bank has been doing the same thing. "It's a great opportunity, why not?"