The Parallax Brief

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Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

Ruble will Remain Stable in Short Term

The Ruble has remained stable against the bi-currency basket today, extending a run of over a week in which it has hovered above its lower limit, much as the Parallax Brief predicted it would.

The Parallax Brief is sticking to its prediction that the ruble will remain at around 41 against the basket in the short term at least, and here’s why:

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Ruble Halts Slide

The precipitous fall of the ruble after the Central Bank of Russia (CBR) ended its managed devaluation program halted this morning.

It had been feared that the CBR would be so alarmed by the nose-bleed drop in ruble value over the last week it might not defend the ruble at the lower limit it set of RUB41 against the bi-currency basket. Financial and Russian media outlets also seemed spooked yesterday when the ruble breached 36 against the dollar, a mark mentioned by the CBR when it drew its ‘line in the snow’ at 41.

However, the Parallax Brief was surprised that outlets like Bloomberg made such a fuss about the 36 mark, which was set as an approximation of the ruble dollar exchange rate (the most important for Russians) if the basket was at 41. The figure did not (and could not) account for a strengthening of the dollar against the euro, which is why yesterday the ruble was able to break the 36 mark while staying within its limit of 41 against the basket.

As the Parallax Brief predicted it would do, the CBR is squeezing ruble liquidity in order to bolster the defense of the ruble. Last week, the Central Bank literally throttled a banking system already gasping for air in order to extrude from the market short positions against the ruble: it provided only RUB389 bn at its repo auctions (against demand of over RUB630 bn), announced that this week only RUB50bn would be offered at its unsecured auction facility, and raised key interest rates by over 100bp. There are even reports that some CBR officials have publicly discussed punishing those banks involved in using money earmarked for bailing out the banking system to short the ruble.

The message was clear: we will defend the ruble, no matter what the effect on you, so get off your short positions and move back to your core business of lending.

The result this morning has been startling, as the CBR has not even had to intervene in the market to sustain the ruble’s position above the 41 mark. Traders have obviously realized, for now, that the CBR is willing to defend its line in the snow.

What next for the ruble?

Of course, a plethora of factors will affect the movement of the ruble in coming months. Russia’s current account, economic growth, budget deficit (or lack thereof), industrial output, capital flows, etc will all impact the ruble. However, for Russia, oil prices have such a pervasive influence the economy that we can mark the ruble’s likely path for given prices of Urals crude oil, Russia’s export blend.

While the CBR has widened the band considerably as part of its switch to a dirty float, the ruble is likely to sit on or near its lower band boundary for the foreseeable future. The current lower mark of RUB41 against the basket correlates to a price of Urals crude of USD40-45 per barrel. Equally, RUB26 against the basket – the top end – correlates to the prices of USD140 we saw in spring last year.

If oil drops into the thirties, and looks like staying there, the Parallax Brief believes the CBR will act quickly and move down the band again. Perhaps the parlous state of key economies for setting oil prices (particularly Chimerica) suggests such a move by Spring, but in the short term, the Parallax Brief is sticking its virtual neck on the line to predict that RUB41 against the basket is here to stay.

Anything else would smash the credibility of the Central Bank. And the ruble.

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