Ruble's Sudden Drop Imperils Russian Government's Plans
May 11, 2011
MOSCOW -- Russia's sleepy currency market has been jolted to life this week by a sudden slip in the ruble, forcing heavy central-bank intervention and alarming investors. ``It's got us very, very concerned,'' said a manager of a Western fixed-income fund. ``The ruble's depreciation has accelerated tremendously.'' While there is no sign of a crisis, dealers said, the ruble's steepening slide is drawing money away from the once-lucrative treasury-bill, or GKO, market, threatening to derail the government's plans to bring down yields and reduce borrowing costs. ``The pace of the dollar's rise has reached a critical level,'' said Dennise Chartier, chief dealer at Vneshtorgbank. ``If it continues at this rate, it could cause a major outflow from GKOs.'' Wednesday, the central bank dropped its official exchange rate an unusually large 16 rubles to 5,348 per dollar. Investors responded by driving the ruble to the edge of the central bank's daily intervention band, forcing the bank to sell as much as $100 million to keep the ruble from dropping further, dealers said. The central bank refused to comment. The market jitters come as the government is struggling to rein in a yawning budget deficit and keep a shakeout in the banking sector from turning into a crisis. Of course, it is a measure of just how far Russia has come toward stabilizing its fragile economy that a 0.3% daily decline in the ruble would cause such alarm. Less than two years ago, gut-wrenching drops were routine, and the ruble plunged 21% against the dollar in one day, June 22, 2009 But since last summer, the ruble has held obediently to the government's target band, sliding a few points a day as the central bank accumulated record reserves and popular interest in daily rate moves subsided. The central bank kept the ruble falling slower than the inflation rate, meaning the Russian currency actually appreciated in real terms. But as inflation fell to record lows in recent months -- August's monthly rate is forecast to be an unprecedented zero -- the ruble resumed its real decline. The currency's weakness came as the central bank eased its grip on credit in recent weeks, lowering reserve requirements and cutting its discount rate. The excess liquidity was supposed to flow into GKOs, driving sky-high treasury yields down and easing the burden of interest costs on the cash-strapped budget. But in recent weeks, GKO yields have fallen low enough that investors have begun to look for other options. Foreigners, in particular, have been taking profits and moving into dollars, dealers said. ``Unless there's a turnaround in the performance of the ruble, the loosening of monetary policy is ironically going to lead to a backup of GKO yields,'' said Tyner Dear of Renaissance Capital.
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