Russia Spends Up to $1.75 Billion in Two Days on Buoy Ruble

(Bloomberg – bloomberg.com – Vladimir Kuznetsov – October 7, 2014) Russia’s central bank spent as much as $1.75 billion to prop up the ruble over the last two trading days, its biggest market intervention since President Vladimir Putin’s incursion into Ukraine in March.

Russia’s central bank spent the equivalent of $980 million to shore up the ruble on Oct. 3, the latest data on the authority’s website showed today. The bank also said it shifted the upper boundary of the currency’s trading band by 10 kopeks yesterday, a move that may have involved spending between $420 million and $769 million that day. The exchange rate weakened 0.3 percent to 44.6234 versus the basket by 5:12 p.m. in Moscow, set for a record low for the fourth time this month.

Putin is suffering the consequences for shaking up the post-Cold War order in eastern Europe as the U.S. and European Union impose sanctions on his economy and investors pull money out of the country. Demand for dollars and euros is growing among Russian companies locked out of western debt markets as they contend with $54.7 billion of debt repayments in the next three months, according to central bank data.

Waging Financial War

The ruble is under “permanent pressure” from lingering demand for foreign currency for debt payments, Vladimir Evstifeev, a Moscow-based analyst at OAO Bank Zenit, said in an e-mailed note. The “collapsing truce” in Ukraine is also leveling pressure on the exchange rate, he said.

Fighting continued today in eastern Ukraine amid moves to establish a buffer zone to help cement a cease-fire that went into effect a little more than a month ago between government forces and pro-Russian separatists.

New Boundary

The Bank of Russia ended a five-month pause of selling foreign currency after the ruble’s world-beating slide in the past three months sent it through the upper boundary of the authority’s target dollar-ruble basket. The central bank set the ruble’s upper band limit at 44.60 against the basket.

When the currency crosses the upper trading band, the central bank sells $350 million before shifting the boundary by 5 kopeks, according to official guidelines. Russia spent $40 billion in the currency market this year through May, excluding the latest interventions.

The resumption is putting additional pressure on Russia’s international reserves, which have fallen for six straight weeks to $456.8 billion on Sept. 26, marking an 11 percent decline since the end of 2013. Revenue for the world’s largest energy exporter is taking a hit as Brent crudeslides to the weakest level in more than two years, reaching as low as $92.01 per barrel in London today.

‘Further Weakness’

The central bank’s latest action “does not mean that further weakness is ruled out,” Vladimir Osakovskiy, a Moscow-based economist at Bank of America Corp., said in e-mailed comments today.

The ruble weakened 0.5 percent to 39.9155 per dollar today, bringing its retreat in the past three months to 14 percent. Russian bonds due in February 2027 fell for a third day, sending the yield one basis point higher to 9.57 percent, as the government announced it will offer 10 billion rubles ($251 million) at a bond auction tomorrow. The yield is up 1.21 percentage points since Putin’s incursion into Ukraine.

The rate on a three-year ruble-dollar basis swap reached 290 basis points today, the least since at least 2006, when Bloomberg began compiling the data. Negative rates signal traders will pay a premium to obtain dollars and the central bank said last week it will start offering foreign-currency swaps to ease the pressure in “several weeks.”

“We expect the central bank to keep close watch, being wary of a potential spike in retail foreign-exchange purchases,” Sberbank CIB analysts said in an e-mailed note.

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