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Russian central bank seeks to keep dollar purchase plan at arm's length-sources
February 3, 2017 / 11:00 AM / 8 months ago

Russian central bank seeks to keep dollar purchase plan at arm's length-sources

(The following is an updated version of a Thursday report, adding Friday’s finance ministry and central bank announcements)

* Rouble to feel extra pressure as cbank returns to market

* Cbank was reluctant to resume interventions - sources

* Plan to rebuild fiscal buffers finds support in Kremlin

* Rouble seen 10 pct weaker at $55 oil under new budget rule

* GRAPHIC - Rouble and oil prices tmsnrt.rs/2kg8djk

By Darya Korsunskaya and Andrey Ostroukh

MOSCOW, Feb 3 (Reuters) - Russia will resume buying dollars next week for the first time since a brief burst in 2015, but sources told Reuters the purchases will go ahead only after a reluctant central bank won assurances it could distance itself from the operations.

People involved in discussions of the planned purchases said the bank had feared investors would regard them as currency interventions designed to weaken the rouble, rather than the stated intention of replenishing Russia’s fiscal reserves depleted by low oil prices and international sanctions.

The central bank, which has a policy of letting the rouble float freely, insists it is not intervening in the foreign exchange market to influence the currency’s rate. Instead, it said last month that it would merely buy the dollars on behalf of the finance ministry, which came up with the plan following a modest uptick in oil prices over the past year.

Nevertheless, the purchases may still create a dilemma for the central bank by putting downward pressure on the rouble after a period of relative calm. Already, the currency suffered its biggest one-day drop so far this year on Jan. 26, when the operations were announced.

The rouble was one of the best-performing currencies globally in 2016. However, the government would stand to benefit from a weaker currency as it means oil revenues earned in dollars would translate into more roubles, allowing it to boost spending. That would be especially helpful in the run-up to elections next year, when President Vladimir Putin is likely to seek a new term.

Describing discussions before the announcement between the bank, finance ministry and Kremlin, three sources said the central bank had had misgivings that buying dollars would hurt its reputation on financial markets.

Governor Elvira Nabiullina had worried she would have to justify the new round of interventions, one former government official familiar with the matter told Reuters.

“But the finance ministry offered a life line by taking responsibility. Now she won’t have to answer uneasy questions,” said the source. “She will say it was the finance ministry’s decision, it’s their money, and we are just acting as an operator.”

The finance ministry announced on Friday that the central bank would buy the equivalent of 6.3 billion roubles ($106 million at current market prices) a day on the Moscow Exchange this month to replenish the country’s fiscal reserves.

The announcement covers purchases to be made between Feb. 7 and March 6.

FACTBOX - Winners and losers from FX purchases

The central bank said it saw less room for interest rate cuts following the announcement of dollar purchases, while keeping the key rate unchanged at 10 percent on Friday.

SOBER POLICY-MAKING

Many investors credit the bank with steering Russia through an economic crisis since 2014, and view it as a bastion of sober policy-making in an otherwise hard-to-predict Russian system.

A spokeswoman for Prime Minister Dmitry Medvedev said the government has no “levers of pressure” on the central bank, while Kremlin spokesman Dmitry Peskov said Putin gave no orders to the bank to start dollar buying.

The bank last bought dollars on the domestic market in mid-2015 in a short-lived attempt to replenish its reserves, halting them to ease downward pressure on the rouble.

Russia’s economy was badly hurt by the combined effects of plunging oil prices in 2014-2015 and Western sanctions imposed over the Ukraine crisis. Its Reserve Fund shrank to just $16 billion by early February from nearly $90 billion before Moscow’s annexation of Crimea in 2014 as the country spent the money to plug holes in the oil-dependent budget.

The International Monetary Fund has welcomed the finance ministry plan as it should help to rebuild reserves, improving predictability of fiscal policy. However, it said the budget needed a “more comprehensive oil framework”.

Despite the central bank’s efforts to keep the purchases at arms’ length, it may struggle to dispel the perception of currency intervention.

“This is indeed a step away from a free float. They are doing the right thing, presenting this as an (action by) the finance ministry, not the central bank,” a person close to the decision-making process in the Kremlin said.

The purchases stem from a budget rule adopted in January. Under this, extra revenues from oil exports would be directed towards rebuilding the Reserve Fund. That means selling roubles on the currency market to buy foreign exchange.

While from a fiscal point of view that makes sense, according to several economists, it will have a knock-on effect on monetary policy. According to finance ministry projections, the currency transactions required to implement the budget rule will push the rouble down.

A weaker rouble could increase inflation and thus delay an economic recovery by prompting the central bank to postpone interest rate cuts.

The amount of interventions will vary, based on average oil prices in the previous month. The finance ministry will disclose the amount of foreign currency it wants the central bank to buy for it at the beginning of every month.

ROUBLE FEARS

The move to resume dollar purchases came after Finance Minister Anton Siluanov and Trade Minister Denis Manturov said Russia was not interested in having a strong rouble.

Even though the finance ministry has since presented the budget rule as a measure to limit the economy’s dependence on oil prices, its appearance shortly after the rouble had firmed to its strongest since July 2015 fuelled speculation that its real goal was to restrain the currency.

“Both the timing and ad hoc way in which this measure has been implemented will lead many market participants to interpret it more as an attempt at FX interventions,” Goldman Sachs said in a recent research note.

With Russia unable to diversify its economy quickly from relying on commodity exports, the budget rule will artificially limit the upside for the rouble as Urals crude URL-E remains well above the $40 per barrel price factored into this year’s budget planning.

If Urals averages $55 - roughly its current level - the budget rule envisages keeping the rouble about 10 percent weaker: the finance ministry sees the dollar at 64.9 roubles under the rule versus 58.05 without the rule. The rouble was around 59.5 on Friday.

Recent gains in the rouble are harmful to influential exporters who want to receive more roubles for the goods they sell in dollars. On the flip side, a stronger currency is better for households and companies operating on the local market as it helps to keep inflation down and makes imports more affordable.

Critics say the manner in which the plans for dollar purchases has been executed calls into question the credibility of Russia’s monetary and fiscal authorities.

“No trust in the rouble will ever emerge if the government devalues the rouble every two years. Manipulations with the exchange rate and monetary policy should not be aimed at solving budget issues,” said Pyotr Milovanov, a currency trader at Metallinvestbank.

Additional reporting by Alexander Winning in Moscow and Gwladys Fouche in Oslo; editing by David Stamp

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