Press about us

21 February 2011

Dow Jones Asian Equities Report

By William Mauldin

MOSCOW (Dow Jones) - The Russian ruble, backed by capital inflows, will continue to appreciate against the dollar until at least the third quarter, according to a VTB Capital banker who oversees more than a third of Russian foreign-exchange trade involving corporations.

The ruble has climbed 7.7% percent against the dollar since its trough in the fourth quarter, appreciating amid inflows of "hot money" from international funds and Russian Eurobond proceeds, VTB Capital head of foreign exchange Mikhail Anisimov said Monday.

"Some hedge funds saw the beginning of the appreciation trend last year, others are following along," Anisimov said. "The market is getting excited about the capital flows that are coming into Russia early this year."

Ruble investors already expect the central bank, which recently switched to buying foreign currency from selling, to raise interest rates at its February meeting, but confirmation of the monetary tightening could still bring an immediate appreciation by a few hundredths of a ruble per dollar, Anisimov said.

Meanwhile, if the central bank doesn't move rates, the ruble will probably only weaken by a few hundredths, or kopeks, against the dollar because the market assumes the Bank of Russia will move toward monetary tightening at some point in the near future in any case, he said.

In the late third quarter and fourth quarter of 2011, however, Russian companies will start to focus on the repayment of short-term foreign debt, and the ruble is likely to stabilize against the dollar and may weaken a bit toward the end of the year, Anisimov said, adding that global economic changes or shocks could change the outlook for the currency.

"The capital inflows in Russia regularly lose momentum by mid-year," said Anisimov, who formerly worked at Deutsche Bank AG. More than any other participants in the foreign-exchange markets, Russian non-financial companies drive ruble trends when they convert dollar-denominated commodity revenues to pay expenses, or when they change rubles into dollars to pay foreign debt, he said.

The financial directors and corporate treasurers are relatively inactive in the late summer, when many Russians go to their dachas or journey abroad on vacation, and whenever possible they seek to repay credit lines by the end of December, when almost all of the country stops work for a 10-day holiday.

International investors have tended to jump on the foreign-exchange trends that originate in Russian companies, amplifying the exchange-rate movements, Anisimov said. Meanwhile, the central bank is largely working as a buffer to reduce ruble volatility against its basket of dollars and euros. The central bank's target corridor currently runs from 33 to 37 rubles to the basket, so the regulator will tend to boost its interventions as the ruble strengthens toward 33, Anisimov said.

"They're trying to cap the ruble appreciation," he said.

On Monday, the ruble was little changed at RUB33.99 to the central bank's basket on the Micex Stock Exchange. It strengthened to 29.16 against the dollar.

This month, the tensions in the Middle East aren't affecting the ruble much, because any risk aversion that weighs on emerging-markets investments is compensated for by an increase in oil prices due to supply fears, giving the ruble a tailwind, Anisimov said.

"It definitely damages the sentiment, but it provides a boost to the current account," he said.

The ruble-dollar pair has recently responded more directly to capital flows than to oil-price fluctuations, Anisimov said. Meanwhile, the ruble-euro pair is more linked to Russia's trade balance; the European Union was responsible for half of Russia's trade in 2010.

Persistent inflows into Russian equity funds, despite outflows in other emerging markets, have also provided a small boost to the ruble, Anisimov said. When brokers sell Russian global depositary receipts to international funds in London, the brokers often take the dollars they receive, convert them into rubles and buy the corresponding local Russian shares to eliminate the risk of being short the GDRs.

VTB Capital had the biggest share of forex trade involving non-financial companies in 2010, with a market share among investment banks of 32%, or $41.6 billion, according to Euromoney.

Corporate Communications VTB Capital