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Now Russia also wants its currency down

Section: Daily Dispatches

Russia Warns Against 'One-Way' Rouble Bet

By Peter Garnham
Financial Times, London
Tuesday, November 10, 2009

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.

The central bank, which bought $700 million and sold the rouble on Tuesday, said lower interest rates would ease upward pressure on the currency alongside a large rouble liquidity injection from the budget in November and December.

The central bank, which closely manages the value of the rouble against a basket of 55 per cent dollars and 45 per cent euros, shifted its intervention level to push its currency up 2 kopecks to 35.19, its strongest level since December 2008.

This took the currency's gains 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.

The situation stands in stark contrast to the central bank's position a year ago when falling oil prices and worries over Russia's banking system in the wake of the financial crisis forced the central bank to dig into its foreign exchange reserves to halt a slide in the currency. The rouble has now recovered more than half the losses it incurred in the wake of the financial crisis.

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 billion 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.

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