Russia aims to cool rouble passion - ‘Not a one way bet,’ says central bank

Russia aims to cool rouble passion - ‘Not a one way bet,’ says central bank
By Peter Garnham
Copyright The Financial Times Limited 2009
Published: November 10 2009 11:01 | Last updated: November 10 2009 19:23
http://www.ft.com/cms/s/0/d33fcd32-cddf-11de-95e7-00144feabdc0.html


Russia’s central bank warned investors on Tuesday that rouble appreciation was not a one-way bet as it sought to stem an advance in the currency sparked by rising oil prices and a falling dollar.

In a stark reversal of the sharp sell-off in the rouble a year ago triggered by falling oil prices and worries over Russia’s banking system, the rouble has become the best performing major currency against the dollar since the start of September.

The central bank bought $700m on Tuesday and sold the rouble in a bid to slow the rise of the currency.

The bank closely manages the value of the rouble against a basket of 55 per cent dollars and 45 per cent euros through such interventions. However, it still allowed the currency to rise 2 kopecks on Tuesday to 35.19, its strongest level since December 2008.

This took the currency’s gains against its basket since the start of September to 8.5 per cent as strong demand for Russia’s oil and a weak dollar have supported the rouble. Against the dollar, the rouble has risen 10.7 per cent over that period.

The rouble has now recovered more than half the losses it incurred in the wake of the financial crisis when the central bank was forced to dig into its foreign exchange reserves to halt a slide in the currency.

However, Sergei Shvetsov, head of the Russian central bank’s open market operations, warned that the rouble would not always move in one direction.

“I’m sure the level of [rouble] volatility will remain the same as with other [currency] pairs and I would not take a risk to predict that the rouble will continue to strengthen,” he said. Mr Shvetsov added that upward pressure on the rouble was rising as a result of carry trades, in which investors borrow in low-yielding currencies to invest in currencies with higher interest rates.

“Therefore rate cuts would reduce pressure on the rouble,” he added.

The Russian central bank has reduced interest rates by 350 basis points since April to 9.5 per cent, but they remain much higher than those seen in the world’s leading economies, thus encouraging carry trade investors.

Mr Shvetsov said the Russian budget would inject hundreds of billions of roubles into the economy in the remaining two months of the year. Institutions financed through the budget were expected to rush to spend their allocation to avoid seeing their share reduce next year.