The Central Bank will respond today to rumors about its devaluation

Today, the Bank of Russia must give a factual response to Friday’s escalation of rumors about a one-time depreciation of the ruble against the dollar, which has already caused an increase in demand for cash dollars over the weekend and the ruble exchange rate in exchange offices on Saturday-Sunday to a level above 27 rubles/$ (at the exchange rate Central Bank - 26.25 rubles/$). Economists consider a one-time devaluation of the ruble unlikely, but believe that it is unprofitable to endlessly resist the pressure on the ruble by the Central Bank - it is too expensive for reserves at a low price for Russian oil.

Rumors about the upcoming devaluation of the ruble by the Bank of Russia this week became the main topic of discussion in the financial community on Friday and Sunday. “The rumors are massive,” says Alexey Borichev, head of the conversion operations department at ING Wholesale Banking. “They are confirmed by panic in the offshore market.” “My phone has been ringing off the hook since this morning,” states Yulia Tseplyaeva from Merrill Lynch. Unofficially, the fact that clients on Friday sought emergency consultations on the issue of possible devaluation was confirmed by Kommersant in absolutely all surveyed analytical departments of both Russian and Western financial companies. Yesterday, one of Kommersant's sources in the banking community said that on Saturday "some banks were summoned to the Central Bank with a demand to stop speculation against the ruble."

The Central Bank could not confirm this information, but the market willingly believes all the rumors. Over the weekend, most exchange offices in Moscow set the dollar selling rate above 27 rubles/$ (the official Central Bank rate on Monday was 26.25 rubles/$), a number of exchange offices in Moscow stopped working, and there was no indication of exchange rates. On Saturday, in a number of Sberbank branches in the center of Moscow, restrictions were in effect on the sale of foreign currency: bank employees sold an amount of no more than $1 thousand per person. According to Irina Kibina, director of the public relations department of Sberbank, the restrictions were in effect only in certain branches of the bank and were due to increased demand for currency. “We make every effort to ensure timely collection of our branches,” she explained, noting that a large amount of currency must be ordered in advance - this has always been provided for by Sberbank rules.

The spread of rumors was facilitated by events in the Central Bank currency swap market and the ruble non-deliverable forward (NDF) market.

According to Alexey Moiseev from Renaissance Capital, “there is complete bloodshed on the NDF market”: on Friday, the ruble exchange rate on weekly forwards strengthened by 28%, on monthly ones by 32%, although a week ago it did not exceed 10%. “The NDF market is dead. There are only people on it who want to take a short position on the ruble. But these are virtual derivatives, this market does not put pressure on the Central Bank,” says Mr. Moiseev. A strengthening of the ruble under NDF threatens losses for banks hedging their operations in this market, which can only be saved by a weakening of the ruble by the Central Bank - it is not present in this market.

A no less difficult situation was developing in the “currency swaps” market controlled by the Central Bank: banks there also face large losses if the exchange rate remains unchanged. Central Bank swaps are an important source of liquidity for banks providing dollar loans to non-residents. Previously, the Central Bank provided unlimited swaps; turnover in this market increased to $3-4 billion on Wednesday and over $10 billion on Friday. On October 17, the Central Bank officially announced that from today it would limit the volume of swap transactions in the dollar, where it was the only seller. The volume of swaps will be limited “taking into account the conditions of the domestic foreign exchange market” and the demand for liquidity.

The implementation of today's decision of the Central Bank on the volume of swaps, taking into account the exchange rate, will be the Bank of Russia's response to talk of devaluation. Economists are confident that in the near future the exchange rate of the ruble to the bi-currency basket ($0.55 + €0.45) will remain within the Central Bank corridor, as Alexey Ulyukaev, First Deputy Chairman of the Central Bank, has repeatedly stated. However, the Central Bank does not specify what the official boundaries of the currency corridor are. On Friday, the ruble exchange rate to the basket was stable and amounted to 30.4 rubles. And Alexey Moiseev says that on Friday he “saw purchases of the ruble,” but they were insignificant.

But scenarios for a sharp weakening of the ruble are also being discussed. One of the economists close to the Central Bank told Kommersant that a scenario is possible when the Central Bank “sharply and simultaneously devalues the ruble by 10% and immediately begins to gradually strengthen it, this will calm down imports and enable the Central Bank to accumulate an additional margin of safety.” “We discussed such a solution. A one-time devaluation, and then a gradual strengthening of the ruble, would add volatility, which would scare away speculators,” admits ING.

“In such a situation, it is difficult to make accurate forecasts, it all depends on the state of the markets,” says Tatyana Orlova from ING Russia. “But we do not expect devaluation. The Central Bank will hold the ruble against the basket and not allow the corridor to expand, no matter what. The ruble remains last a bastion of confidence, its collapse would provoke panic among the population and a massive outflow of deposits." According to Yulia Tseplyaeva, the Central Bank needs about $30 billion a month to support a stable ruble exchange rate; household deposits in banks, according to the Central Bank, as of August 1 of this year, amounted to about $223 billion. “Devaluation will lead to a massive outflow of deposits. Judge for yourself, What’s cheaper? But what’s really on the Central Bank’s mind is unknown,” she states. Alexey Moiseev notes that a sharp strengthening of the ruble will add problems to banks. “The banking system is in a structural long position in the ruble; a sharp devaluation of the ruble will lead to serious problems for banks,” he says.

The government is reluctant to give exchange rate forecasts. “The period of strengthening has passed, stabilization has set in. In real terms, the ruble is still strengthening,” a senior government source said on Friday. He noted that the official forecast for the nominal exchange rate of the ruble to the dollar for this year (26-27 rubles per dollar) has not been revised. “Fundamental changes are not expected if the price of oil does not fall below $90 per barrel for a long time,” he clarified.

Maintaining the ruble exchange rate for the Central Bank is more than free: in the week from October 3 to October 10 this year alone, the international reserves of the Central Bank, against the backdrop of capital outflow of $13 billion, decreased by $15.5 billion, to $530.6 billion (see Kommersant, 17 October). On Friday, First Deputy Chairman of the Central Bank Alexey Ulyukaev told RIA Novosti about clarifying the parameters of the main directions of monetary policy for 2009-2011 and revising the forecast from $40 billion in net capital inflows this year to $20 billion in net outflows.

If the Central Bank's reserves continue to decline at the same pace, neither representatives of the monetary authorities nor economists rule out a devaluation of the ruble, albeit in the medium term. According to Yulia Tseplyaeva, if oil prices are below $60 per barrel for two quarters, the Central Bank will leave the market. “It would be foolish to stay the course in such a situation,” she notes. According to Argus, on Friday the price of Russian Urals oil dropped to $64.5 per barrel. “Russia remains one of the last countries whose currency has survived the global crisis. But I don’t think that the Central Bank and the Ministry of Finance will repeat the mistakes of 1998 and go against the market,” says Alexey Borichev. He believes that the Central Bank may leave the market earlier, “as soon as we pass the level of reserves of $500 billion” and in the event of “serious speculative attacks on the ruble.”

Whether such an attack will be undertaken and whether the Central Bank will withstand it will become clear today. At the same time, a political justification for devaluation is quite possible. It could be announced as a measure to support industry: let us recall that the Central Bank has been accused by exporters and lobbyists for several years of maintaining an overvalued ruble/dollar exchange rate.

Dmitry Kommersant-Butrin, Alexey Kommersant-Shapovalov, Elena Kommersant-Pashutinskaya

The ruble will pass the word test