(Bloomberg) -- To an already long list of American grievances against Russia, President Donald Trump added a new item this week: Currency manipulation.
Russian pushback began in Washington.
What Trump called “playing the currency devaluation game” was only the market doing its job, Bank of Russia First Deputy Governor Ksenia Yudaeva said in an interview at the International Monetary Fund’s spring meeting in the U.S. capital. “Russia isn’t carrying out any special policy to depreciate the currency,” she said. “We adhere and will adhere to the free-floating exchange rate regime.”
Analysts agree that Russia’s not guilty on this count: If the ruble has been drifting downwards lately, that’s because of White House policy, not Kremlin strategy. And investors say that where the Russian currency moves from here may largely depend on what Trump does next.
The ruble’s slump last week, when it posted a loss of almost 8 percent in two days, was triggered by a new round of U.S. sanctions, some of the harshest measures imposed in several years of political tension. The targets included aluminum giant United Co. Rusal and its main owner, Oleg Deripaska, and the effects have rippled through global commodities markets.
Not Making Sense
The U.S. and others have long blamed China for such practices. Leveling the charge at Russia -– whose trade with the U.S. is too small to make it onto the list of countries scrutinized by the Treasury -– is something new.
“The message from the president on the currency did not make sense,” said Doug Rediker, founder of political consultancy International Capital Strategies LLC in Washington, and a former board member of the IMF. “One could argue that any weaker Russian currency would not be the result of Russian manipulation for competitive advantage, but rather the result of actions taken by the U.S.”
While Yudaeva said that the ruble is a free-floating currency and will stay that way, last week the central bank did temporarily suspend regular foreign-currency purchases, which it carries out on the Finance Ministry’s behalf to insulate the economy from oil-price volatility. Yudaeva said the bank has discretion to shift the timing of those purchases. “Markets were functioning normally, that is why no additional measures were necessary,” she said.
While they’ve steadied somewhat, Russian currency markets remain volatile. The ruble weakened 1 percent to 61.5175 per dollar at 5:00 p.m. in Moscow on Friday, the biggest drop among its emerging-market peers.
The central bank’s resumption of FX purchases -- in larger volumes to compensate for the days of inaction -- may be spurring today’s ruble decline, according to traders from Nomura International and Metallinvestbank, who also cited weaker oil.
The sanctions were intended to punish Moscow for meddling in the 2016 U.S. election -– one episode in the steady deterioration of ties, which hit a new low this month as the two nuclear powers traded military threats over Syria.
The U.S. ambassador to the United Nations, Nikki Haley, said more financial penalties were imminent over Russian conduct in that conflict -- and then other administration officials said they weren’t. And it’s precisely that uncertainty that’s making it hard for ruble investors to figure out which way to bet.
‘Is It Toxic?’
“The fundamental case remains a supportive one,’’ said Alessio de Longis, a New York-based portfolio manager at Oppenheimer Funds Inc., which oversees more than $249 billion in assets. He said he’s cut back on ruble holdings, part of a broader reduction of emerging-market currencies as volatility increased, while remaining overweight.
“Is it toxic at the moment as a result of increased volatility and a lot of the open questions out there? Yes,’’ de Longis said of the ruble. “Is it toxic, is it a bad asset from a valuation and fundamental case? No.’’
Paul Greer says that the ruble’s prospects, like its recent past, will be shaped by U.S. policy. A London-based money manager at Fidelity International, he’s underweight Russian corporate and sovereign debt, citing the “extreme uncertainty that persists with the future path of U.S. sanctions escalation.’’
The risk of further punitive measures “is still very much there,’’ he said.
Yudaeva, the central bank official, said the ruble may take time to stabilize. “During that process of searching for a new equilibrium, there’s always a small overshoot,” she said.
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