Russia said to concede rouble gains by waiting for the rally to burst

The Russian government is prepared to ride out the current period of rouble appreciation and refrain from steps to counter gains in the currency, according to two senior officials with knowledge of the discussions.The restraint is based on the assumption that a drop in oil prices by the third quarter, alongside deeper monetary easing, will weaken the currency in the second half of the year, one of the people said.The growing acquiescence to a stronger rouble marks a change of tack for the government after efforts to talk down the currency foundered. After losing half its value against the greenback in 2014-2015, the rouble has rallied 20% in the past year as oil prices recovered, making it the best performer globally in that period.What is crucial to the rouble’s fortunes is just how long the Bank of Russia can hold back from faster rate cuts. The government is more accepting of the central bank’s reluctance to rush with reductions on the path to record-low annual inflation even as its tight policy keeps up the appeal of the rouble carry- trade, the official said. Both people requested anonymity because they haven’t been authorised to speak publicly about the government’s thinking.While policy makers are right to be cautious now - avoiding a need to raise interest rates later - they may soon have to contend with the threat of deflation, the official said. If inflation stabilises at a low level, the Bank of Russia will step up easing in the second half, the person said. That will be the undoing of carry-trade investment, according to the official.While a stronger rouble helps the central bank curtail inflation by cutting into the cost of imported goods, it also reduces Russia’s local-currency revenue from energy sales that are denominated in dollars. Concerned about the toll on the budget, the Finance Ministry started a programme in February to use windfall revenue from higher-than-forecast oil prices to buy foreign currency. That programme has also failed to halt the rouble’s advance. Finance Ministry warned two weeks ago that the rouble’s level was about 10-12% “overvalued compared to fundamental valuations.” Governor Elvira Nabiullina questioned that assessment days later and said the central bank believes the divergence is “much less.”The Bank of Russia resumed easing in March after a six- month pause by cutting its benchmark rate by a quarter point to 9.75%. But the rouble’s appeal still hasn’t dimmed for global investors, who’ve earned a carry-trade return of 11% this year, the highest among emerging markets after Mexico’s peso. The rouble just racked up its fifth straight quarterly gain, the longest winning streak since 2008.One reason the authorities believe the rouble’s surge may prove short-lived is their outlook for oil. The government and the central bank both take a bearish view, using Urals crude price of $40 a barrel for the budget and forecasts.Other factors will work against the rouble later this year, according to the official. As Russia sees the return of workers from former Soviet states, who need foreign currency to send remittances home, demand for dollars will rise, the person said.