Ruble Soars to 7-Year High Prompting Debate Over Targeting Rate

(Bloomberg) — The ruble surged to a seven-year high, extending a rally that Russia wants to curb and sparking a debate in Moscow on whether the central bank should target an “optimal” exchange rate.

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The currency jumped as much as 1.7% to 55.44 per U.S. dollar, its strongest level since July 2015 based on Moscow Exchange prices. That took its advance this year to 35%, a world-beating gain that has continued unabated even after policymakers lowered the benchmark rate by 1,050 basis points and relaxed capital controls imposed in response to Western sanctions.

Government officials have touted the rebound as evidence Russia has weathered the international penalties over its invasion of Ukraine, but they’re growing increasingly wary of an advance that undermines the nation’s export competitiveness and budget finances.

The Bank of Russia’s easing measures have had little impact on the ruble’s momentum, which is driven by restrictions on dollar transactions and poor demand for the greenback amid a collapse in the nation’s imports.

Top officials in the government and central bank put forward opposing views Monday on a target for the ruble exchange rate. First Deputy Prime Minister Andrey Belousov said authorities discussed a set goal for the ruble and prioritizing economic growth. An “optimal” rate is between 70 to 80 rubles per dollar, he said.

Hours after Belousov’s comments surfaced, a senior central banker warned against such a policy shift.

“If implemented, any ideas related to the targeting of the exchange rate will inevitably lead to a decrease in the effectiveness and loss of the sovereignty of the economic policy pursued,” Deputy Governor Alexey Zabotkin said at a parliamentary budget hearing. Russia floated the ruble in November 2014.

Putin’s former finance minister, Alexei Kudrin, said Russia was unlikely to consider the targeting option. According to analysts, authorities lack the means to influence the Russian currency, even if they wanted to. Allowing foreigners to sell assets could weaken the ruble, but would be politically impossible, according to Dmitry Polevoy, an economist at Locko Bank JSC.

Revenue Curse

The ruble has been on a roller-coaster ride since Russia’s invasion of Ukraine.

The war initially sparked a rout, sending the currency to a record low of 121.5275 per dollar on March 10 as the US and Europe sought to isolate the country from the international financial system. But after Moscow imposed mandatory foreign-exchange sales on exporters and required some buyers of energy products to pay in rubles, the currency turned around and posted an 118% rally.

While that helped Russia dodge a foreign-exchange crisis, it became a worry for the central bank as it undercut export revenues in local-currency terms and made the country’s goods more expensive abroad. The bank responded with a flurry of easing measures.

Currency gains have continued nevertheless, underscoring traders’ expectation for a fuller relaxation of capital controls and measures to revive consumer demand and economic growth.

The ruble traded 1.2% higher at 55.74 per dollar as of 5 p.m. Moscow time.

(Adds details from first paragraph, updates exchange rate)