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Nov 10, 2014 6:55 AM

In shift, Russia lets ruble float free in markets

The Associated Press

MOSCOW (AP) With the Russian ruble in a nosedive under the pressure of Western sanctions and slumping oil prices, the country's central bank decided Monday to freely float the currency in markets and stop regularly spending billions in a vain attempt to stem its fall.

The bank has been burning through its reserves, which plunged from $510 billion at the year's start to about $400 billion now, to soften the drop in the ruble, which has lost about half its value since the beginning of the year as investors pulled money out of Russia and the economy headed toward recession. It spent $30 billion last month alone an unsustainable rate.

On Monday, the central bank said it would let the market decide what value to give the ruble, which touched a record low of above 48 to the dollar on Friday. It also warned, however, that it would be ready to intervene if necessary to maintain financial stability.

A free float could see the ruble depreciate further in the longer term, stoking inflation and other economic problems for Russians. But investors welcomed the central bank's move as a necessary step protect the nation's hard currency reserves and curb market speculation.

As a result, the ruble strengthened sharply on the news, trading up 3.6 percent at around 45 rubles a dollar in midday trading.

The central bank will stop setting daily limits for the ruble's fluctuations and will not have any obligation to intervene regularly in markets to support the currency. However, Central Bank Chief Elvira Nabiullina said the regulator will "intervene in the market at any moment in the amount necessary to counter speculative demand."

Speaking in Beijing, where he attended the Asia-Pacific Economic Cooperation summit, Russian President Vladimir Putin voiced confidence that the central bank's move will help stabilize the ruble.

"We have seen speculative fluctuations of the rate, but I think it will end soon in the face of action taken by the central bank in response to action by speculators," he said.

The central bank has been eating through its hard currency reserves to prop up the ruble, spending $30 billion last month alone. It also has steadily raised its base interest rate from 5.5 percent to 9.5 percent last month to entice investors with higher returns. The ruble kept falling.

Observers said Russian banks were able to earn easy profits by taking loans from the central bank and buying dollars in the currency markets, a strategy that helped drive the ruble down further.

Nabiullina said the central bank will introduce restrictions on the amount of loans offered to financial institutions to ease pressure on the ruble.

"We will temporary limit liquidity in rubles, because it's being used not only for financing the economy but also for currency market speculations," she said.

Market watchers said the ruble's trading band encouraged investors to test the limits set by the central bank.

"The central bank has been effectively telling the market that every time the ruble moves a certain amount, we will intervene," Chris Weafer, an analyst at Macro Advisory in Moscow, told The Associated Press. "That's like playing poker against the market people have been betting against the Central Bank and winning."

Finance Minister Anton Siluanov also said the regulator should have made the move earlier. "The decision is a bit belated," he said, according to the Interfax news agency. "When the ruble came under pressure, it was unnecessary to maintain the currency corridor and sell hard currency reserves," he said.

Siluanov argued that the ruble had been driven down by speculators, adding that market forces will help it rebound.

However, slumping oil prices and uncertainty over the U.S. and European Union sanctions for Russia's action in Ukraine will likely keep pressure on the ruble.

"The problem is we still have this big shadow of east Ukraine, the threat of sanctions is hanging over the whole economy and the currency," Weafer said. "So while the Central Bank said they were free floating except on days of volatility that still keeps the game alive because traders looking at the news from Ukraine will be likely to bet that the Central Bank will intervene. So we're still going to have some volatility."

The ruble is expected to come under more pressure next year, when Russian companies and banks will have to pay back about $100 billon in hard currency debts, he added.

"So long as people are fearful of other factors such as Ukraine sanctions, any use of reserves to prop up the currency will only be short term and it will be a waste of money," Weafer said.

The central bank on Monday revised up its estimates for how much money will be pulled out of Russia this year, from $90 billion to $128 billion. It predicted zero economic growth next year.

With Russia strongly dependent on a broad variety of imports from staples to industrial equipment the ruble's tailspin will be certain to fuel inflation.

Ordinary Russians have watched the currency's steady decline with a mixture of fatalism and resentment and many noticed that consumer prices were rising more quickly.

"With groceries, the prices are rising significantly," Yury Friyuk, an acrobat with a local circus. "It never seems like it's hitting your pocket that hard, but by the end of the month you can feel the difference."


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