Russian central bank plays it cool as ruble falls to historic low

By bne IntelliNews October 16, 2014

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The ruble dropped to another historic low on October 15, passing the  RUB41 per dollar mark in  morning trading, but analysts said Russia's central bank is not panicking because  ruble weakness is bolstering manufacturing growth and budget revenues.

"The CBR is not panicking either in terms of the scale of its intervention - verbal or direct - or rate hikes," said Standard Bank analyst Tim Ash in a research note. "They appear comfortable with ruble weakness - seeing this as an escape valve for market concerns and also a likely kicker for growth," Ash explained, adding that Russia had been suffering from a phenomenon known as 'Dutch disease' - meaning large hard currency revenues from oil and gas exports cause excessive appreciation of the domestic currency, making local manufacturing uncompetitive. "They appear comfortable both with the extent and pace of ruble weakening at present," Ash underlined.

Backers of a weak ruble as part of the Kremlin's much touted import substitution growth policy will be bolstered by September's manufacturing results showing a 2.8% on the year in industrial production, following zero growth in August, although some of this growth is the result of September 2014 having one extra working day than September 2013. "We believe that import substitution thanks to the weak ruble will moderately support Russia's manufacturing," wrote UralSib analysts, listing food, machinery, chemicals, plastics, textiles, and wood processing as likely beneficiaries.

A weaker ruble also takes pressure off the budget coming from slower than forecasted growth, say analysts, since around half of Russia's budget revenues come from hard currency export revenues from oil and gas exporters.

However, the positive effect on the budget of ruble devaluation will be mitigated if an ongoing drop in the price of oil continues. The price for a barrel of Brent crude oil fell to a fresh four-year low of $83.9 per barrel on October 15, following the biggest one-day fall in the price of oil since 2011. The price of oil has dropped by more than 20% since peaking in mid-June.

With the Central Bank playing it cool, it was left to the finance ministry to provide some support. Finance Minister Anton Siluanov announced his ministry would hold foreign exchange deposit auctions in the coming weeks, to ensure demand for foreign currency on the part of banks was met. Analysts said the finance ministry could auction as much as $5.7bn.

"A fairly large amount of hard currency has accumulated on the treasury accounts and together with the central bank we can bring this on to the market to supply more liquidity," Siluanov said, as quoted by Interfax. 

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