Ruble: Sink or swim?

Russia’s central bank widened the ruble’s trading band in a step toward a free float, signaling confidence in the currency amid the conflict in Ukraine.

Policy makers increased the corridor for to 9 rubles from 7 rubles and abandoned interventions within the band, according to a statement on the Bank of Russia website today. The ruble (CME:R6U14) strengthened 0.3% to 41.5176 against the bank’s target basket of dollars (NYBOT:DXU14) and euros (CME:E6U14) by 5:13 p.m. in Moscow. The yield on 10-year government bonds (CBOT:ZNU14) rose one basis point to 9.28%, snapping five days of declines.

The changes are intended to help complete the shift to a freely-floating ruble near the end of the year, which the central bank says is necessary to adopt inflation targeting and put interest rates in the focus of its policy, rather than currency interventions. The monetary authority made the move as the latest diplomatic effort to end the bloodshed in Ukraine stalled and sanctions from the U.S. and its allies increased the risk of a recession in Russia.

“The decision is well-timed,” Natalia Orlova, the chief economist at Alfa Bank in Moscow, said by phone. “The ruble is stable now and the regulator can widen the corridor.”

The central bank hasn’t intervened to keep the ruble in its targeted corridor since May, after spending $44 billion on preventing the currency from sharper depreciation earlier in the year. Its 30-day historic volatility dropped 14% over the past 3 weeks, according to data compiled by Bloomberg. The swings are still the biggest among 24 leading emerging markets after the Indonesian rupiah and Turkish lira.
 


Market ‘Signal’

“This is a signal for the market to look more to the interest rate” than the ruble to gauge policy, Orlova said.

While the state’s role in the economy has been increasing under President Vladimir Putin in a reversal of the country’s trajectory since the fall of communism, central bank Governor Elvira Nabiullina is intent on loosening controls on the currency’s flexibility and prioritizing the fight against inflation. The central bank has kept a tight grip on the ruble since a default on local-currency debt in 1998.

The free float would mark the final step away from the tight currency control during Soviet times, when authorities used multiple exchange rates -- among others for citizens and for accounting trade with allies. While the central bank stopped active currency management after the collapse of the Soviet Union, capital controls remained in place until 2006, when the ruble became fully convertible.

“For all practical purposes, the ruble has already been a free-floating currency of late,” VTB Capital analysts Maxim Korovin and Anton Nikitin said in an e-mailed note. “During periods of excess stress, the central bank would still be making interventions in some form or other, we expect.”
 

Showing Independence
 

The monetary authority said the decision “will not have a significant impact on current ruble fluctuations” since the currency is trading within the band. The Bank of Russia has managed the ruble since 1999, the year after the government defaulted on $40 billion of domestic debt, by buying or selling reserves to curb its gains or declines.

The central bank has already been showing its independence by withstanding calls from politicians to help stimulate the flagging economy with lower borrowing costs.

Providing some support for the currency, policy makers raised the main interest rate by 2.5 percentage points this year to 8%, including a surprise 50 basis-point increase last month, to temper inflation that exceeded 7% in the four months through July, above the 5% central bank target. The 2015 goal is 4.5%.
 

New Corridor
 

The new corridor is 35.40 to 44.40 rubles against the target basket and the exchange rate is currently 6.5% from the upper boundary. The central bank previously bought and sold $200 million per day when the ruble breached certain levels within the corridor.

Russia’s currency, which weakened in 2013 as the Federal Reserve signaled it would start winding down monetary stimulus, came under pressure this year as Putin’s standoff with the U.S. and its allies triggered a selloff in the nation’s assets. Sanctions are threatening the Russian economy with the worst performance since a recession in 2009.

The world’s biggest energy exporter, had $469 billion of foreign exchange and gold reserves as of Aug. 8.

“The central bank would rather allow faster depreciation, if conditions so dictate, than erode reserves trying to intervene,” Tatha Ghose, a London-based analyst at Commerzbank AG, said in an e-mailed report. It seeks to “put a higher value on the country’s foreign-exchange reserves,” he said.

Under the new rules, the regulator plans to make quicker adjustments to the ruble corridor by decreasing the amount of interventions needed to shift it up or down by 5 kopeks to $350 million from $1 billion previously. The regulator can buy or sell unlimited amounts of currency as soon as the ruble moves outside the range, it said in the statement.

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