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

(Bloomberg) — The ruble rose to the highest level since July 2015, extending a rally that’s worrying the Bank of Russia as it may undermine the nation’s export competitiveness and government finances.

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The currency jumped as much as 1.7% to 55.44 per U.S. dollar, taking its advance this year to 35%, the biggest among global exchange rates tracked by Bloomberg. The gains come even after policymakers lowered the benchmark rate by a total of 1,050 basis points and relaxed capital controls imposed in response to Western sanctions.

The rally sparked a debate at the highest levels of Russia’s government and central bank on Monday over targeting a ruble exchange rate. First Deputy Prime Minister Andrey Belousov said authorities discussed targeting a ruble rate and prioritizing economic growth. That required an “optimal” exchange rate of 70-80 rubles per dollar, he said.

Hours after Belousov’s comments surfaced, a senior central banker warned against a policy shift toward targeting the ruble.

“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. Meanwhile, analysts said authorities had no effective means of influencing the Russian currency even if they wanted to. Allowing foreigners to sell assets 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 0.8% higher at 55.9525 per dollar as of 3:35 p.m. Moscow time.

(Adds chart, details of targeting debate; updates exchange rate)

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