By Andrey Ostroukh
MOSCOW--Russia's ruble hit fresh record lows on Tuesday, as
investors grew worried the central bank might take more drastic
steps, such as boosting interest rates sharply or accelerating a
planned shift to a free float, as other efforts to slow the
currency's slide have so far had little effect.
Russia's former finance minister Alexei Kudrin said on Tuesday
that the central bank needs to let the ruble float freely earlier
than the initial plan to do so in 2015, Russian news agencies
reported. The Kremlin has already warned it won't burn the reserves
"thoughtlessly."
"There is a rumor on the market that the central bank may let
the ruble float freely. If they scrap the trading band, there might
be another spike higher [in the dollar] despite a widely expected
hike to interest rates," said Igor Akinshin, a dealer at Alfa
Bank.
The ruble has been hitting historical lows almost daily this
month, as the price of oil, one of Russia's key exports, has
dropped below $90 a barrel. Meanwhile, Russian banks and companies
have been stocking up on dollars and euros at home, after being cut
off from borrowing abroad by Western sanctions.
The central bank has introduced currency swaps and
foreign-exchange repurchase agreements to provide dollars to the
market, which is hungry for foreign currencies. The finance
ministry also has pledged to provide banks with dollars, but the
selling pressure on the ruble has only increased. The central bank
has sold over $23 billion this month to buttress the home currency,
but the ruble has still dropped nearly 7% against the dollar.
The central bank and the government have ruled out capital
controls as a way to save the ruble from falling, so the next
steps, say economists, could be a big rate increase or a quicker
move to a free float, a shift originally set for January 1. Both
measures would be potentially painful, as a rate rise would hurt
the stagnant economy, while a float could lead to a sharp drop in
the value of the ruble.
On Tuesday, the ruble hit a record low of 42.60 versus the
dollar, bringing the year-to-date depreciation to 23%. Against the
euro, the Russian currency weakened to a record low of 54.19.
"The continued slide in the ruble over the past few weeks has
raised the prospect that Russia is in the grip of a self-fulfilling
currency crisis in which the mere anticipation of currency weakness
spurs further capital outflows and pushes the ruble even lower,"
research firm Capital Economics said in a note on Tuesday.
The ruble's behavior this month isn't typical for the second
half of the month, when export-focused companies usually convert
dollar and euro revenues to meet local tax duties.
According to Gazprombank estimates, Russian companies had to pay
some 650 billion rubles ($15.3 billion) in the first two days of
this week but that did little to underpin the ruble. Given the
ruble's steady depreciation, export-focused companies are in no
rush to convert foreign currencies for tax duties.
The central bank's predictable interventions make it easier for
market participants to bet on the ruble's depreciation. According
its practice in interventions, the central bank starts selling $350
million if the ruble eases to the weak end of its trading corridor.
Once the allotment is exhausted, it shifts the band 5 kopecks
higher and starts spending reserves again.
On Tuesday, the ruble hovered at its historically weakest value
of 47.77, suggesting its nine-ruble-wide band stood at 38.80-47.80
against a euro-dollar basket. Thus the central bank shifted the
ruble's band 68 times so far this month and carried out the
heaviest intervention since March when the central bank had to step
in to save the ruble following Moscow's intention to send troops to
Ukraine's region of Crimea.
The Bank of Russia, which doesn't comment on the exact timing of
switching to the ruble free float, remains the last hope for those
who would like to see a stronger ruble. The bank has pledged to
intervene if needed even after it lets the ruble float freely and
is working on ways to provide the market with hard currencies
without drawing on reserves, which stood at around $450 billion
last week.
On Wednesday, the central bank is set to hold its first auction
of foreign-exchange repurchase agreements, in which it will offer
banks $1.5 billion for four weeks. At a one-week auction on
Thursday banks will be able to borrow $2 billion from the
regulator.
The central bank is also widely expected to raise interest rates
at its board meeting on Friday, as inflation has reached 8.3% on
the year, overshooting the central bank's 2014 targeted ceiling of
6.5%.
To regain initiative the central bank needs to raise interest
rates this week by more than the market expects, Capital Economics
said. The research firm suggested that the market expects the
central bank to raise rates by 50 basis points, though some banks,
including Morgan Stanley, said recently a 100-point rate hike could
be possible by the end of the month.
Expectations of a rate increase push ruble bond yields higher,
increasing attractiveness of buying into Russian debt. But at the
same time climbing rates make the finance ministry reluctant to
raise funds by selling high-yielding Treasury bonds. On Tuesday the
ministry said it canceled its weekly treasury bond auction for the
third week in a row, citing unfavorable market conditions.
Write to Andrey Ostroukh at andrey.ostroukh@wsj.com