Ruble Band May Be Widened 5%, Korishchenko Says

By Emma O'Brien and Alex Nicholson

June 26 (Bloomberg) -- Russia may expand the ruble's trading band by as much as 5 percent at each end to deter speculation and force the currency lower, said Konstantin Korishchenko, deputy chairman of the country's central bank.

``The corridor will get wider,'' Bank Rossii's Korishchenko said yesterday in an interview in Moscow. ``That would mean adequate volatility would be achieved. It could create a massive unwinding of positions that will effectively implement this depreciation.'' He didn't give a timeframe for widening the range.

The ruble is kept within a trading band versus a basket of euros and dollars to prevent gains that would hurt the competitiveness of Russian exports. That policy has come under strain as rising oil and gas prices and 10 years of economic growth drove inflation to 15.1 percent in May. Investors have been lured to the currency on speculation the central bank will have to let it rise to reduce prices on imported goods.

The Russian currency strengthened about 0.6 percent this year to as high as 29.4835 against the basket, which is made up of 55 percent dollars and 45 percent euros. It gained 4.8 percent against the dollar and fell 2.5 percent versus the euro.

After keeping the ruble little changed at 29.61 versus the basket since the beginning of March, Bank Rossii widened the range by 0.5 percent, or 10 kopeks, on June 10 as part of a new foreign-exchange policy announced the previous month. It will buy and sell the currency at different and unpublicized levels within that corridor to make it a two-way bet for speculators, it said.

Wrong Bets

The wider band will make it harder to predict the point at which the central bank will intervene. That will make it costlier for traders to limit losses should bets go the wrong way, Korishchenko, 49, said. Before Russia announced the new policy on May 14, the ruble's band was 15 kopeks on either side of the basket rate.

Banks including Merrill Lynch & Co., BNP Paribas SA and Dresdner Kleinwort predict spiraling inflation in Russia will force the central bank to let the ruble rise as much as 5 percent against the basket this year. They advised investors to put so-called long positions on the ruble. A long position is a bet the currency is going to rise.

Bank Rossii plans to ``definitely increase'' the amount of dollars it purchases to weaken the ruble and boost volatility, Korishchenko said. ``We've just started the process, we've just put our toe in the water.''

`Encourages Inflows'

To stifle consumer-price growth, the central bank has raised Russia's main interest rates three times this year and increased reserve requirements for local banks.

The bank will use ruble appreciation, interest rates and reserve levels to help bring down inflation this year, Korishchenko said. ``There is no one tool preferable and favorite and there should not just be one tool,'' he said.

Bank Rossii let the currency rise as much as 1.3 percent against the basket last year as annual inflation accelerated to 11.9 percent. A 1 percentage-point increase in the ruble versus the basket cuts inflation by 0.3 percentage point, according to the central bank.

While letting the ruble strengthen helps cut import prices, it can also boost inflation as it ``encourages inflows,'' Korishchenko said.

Net capital flows into Russia rose to a record $82 billion last year, according to central bank figures.

``Number one in our thinking are the risks associated with ruble appreciation,'' Korishchenko said. ``The effect on inflation is number two.''

The central bank calculates the ruble's rate against the basket by multiplying its price versus the dollar by 0.55 and its rate against the euro by 0.45, then adding the two figures together.

To contact the reporters on this story: Emma O'Brien in Moscow at eobrien6@bloomberg.net; Alex Nicholson in Moscow at anicholson6@bloomberg.net