Russia enlists in currency war

Russia lambasted Japan and other countries this week for deliberately weakening their currencies to gain competitive advantage in global trade. Alexei Ulyukayev, the central bank’s first deputy chairman said: “We’re on a threshold of very serious, confrontational actions in the sphere that is known… as currency wars.”

So how come Russia itself is buying dollars to weaken its own currency?

The rouble has been strengthening against the US dollar since May last year and the central bank has intervened frequently – buying or selling roubles, it would argue, to smooth out volatility and maintain relative stability on the currency market.

As figures on its website show, the bank sold 4.83bn roubles ($160m) last Thursday, 5.15bn roubles on Friday and 190m roubles on Monday. Then it stopped. Why?

“The intervention has worked,” says Ivan Tchakarov of Renaissance Capital in Moscow. “They were selling roubles and buying dollars to stop the rouble from strengthening.”

Job done? Probably not.

“If you asked the central bank to explain itself in writing, it would present this as smoothing out volatility,” says Tchakarov. “But they are worried. They would like a weaker currency.”

Tchakarov says Russia’s economy is in a “soft spot” where any loss of competitiveness only adds to its pain. GDP growth was 4.9 per cent in the first quarter of last year but slowed to 2.9 per cent by the third quarter. RenCap expects just 2.2 per cent in the fourth quarter. “Russia’s economy is not very competitive so it makes sense to have a weaker currency,” adds Tchakarov.

So is Russia gearing up for all-out currency warfare? Ulyukayev’s statement on Wednesday, says Tchakarov, was something new.

“That’s the first time I’ve heard a senior official say anything like that. It was definitely an important statement.” Implicit in the remarks, says Tchakarov, was a readiness to join Japan and others in currency manipulation.

Next month’s G20 meeting of finance ministers and central bankers in Moscow will be well worth watching.

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