The ruble scaled fresh 14-month highs on Tuesday, increasing speculation that the Central Bank would step up currency interventions or speed up interest rate cuts to keep a fragile economic recovery on track.
The ruble has rallied 2.6 percent against its currency basket in the past month, reflecting a 10 percent surge in the price of oil. That has eaten into the ruble value of foreign currency revenues of exporters, including influential energy and commodity giants.
"There are many factors supporting the ruble. Oil is one of them [and] interest rates remain high compared to [close to] zero in other countries," said Vladimir Osakovsky, an analyst at UniCredit.
"But the ruble's appreciation is not very favorable for the economy."
So far, dealers say the Central Bank has been shifting the ruble's floating trading band by 5 kopecks for each $700 million of interventions at its boundary, as part of a policy to smooth out volatility without stifling market trends.
On Tuesday, the boundary was shifted twice, to 34.50 to 37.50, taking the number of such moves to 10 in the past three weeks, dealers said. The ruble firmed as far as 34.52.
The market is now on high alert for any possible changes to the intervention parameters after Central Bank First Deputy Chairman Alexei Ulyukayev said last month that the size of the boundary shifts could be changed, without giving any more details.
"I think bigger interventions are quite likely in the future," said a dealer at a European bank in Moscow.
Yaroslav Lissovolik, chief strategist at Deutsche Bank in Moscow, said the Central Bank would continue in the long run to allow increased ruble volatility as it moves toward a long-term goal of a "dirty" free float involving periodic interventions.
"I think the Central Bank will, from time to time, step up its interventions, but overall the policy will be more flexible," he said.
Russia holds about 47 percent of reserves in dollars, 41 percent in euros and 10 percent in pounds. To keep this composition intact, the Central Bank will have to sell some of its newly purchased dollars for euros and pounds.
So any increase in interventions could mean greater repercussions for the global forex market.
In addition to the interventions at the trading band's boundaries, the Central Bank also carries out smaller currency market operations within the corridor, which dealers estimate at about $200 million to $300 million a day.
Another way to put the brakes on the ruble's rally would be through more rate cuts.
Despite 450 basis points of easing in the past year, Russia's refi rate at 8.5 percent still offers attractive yields compared with 1 percent or less in the other Group of Eight economies.
"It [ruble strength] increases the likelihood that they will cut rates in March," said Alexandra Yevtifyeva, an analyst at VTB Capital.
A poll published last week predicted that the refi rate would cut by another 75 basis points by end-September.
Russia's economy is returning to growth after suffering its biggest contraction in 15 years in 2009. But with both services and manufacturing PMIs falling in February — the latter to near-stagnation levels — the recovery remains fragile.
One potentially mitigating factor — both for the economy and for the public — is that the ruble's rally has been most pronounced against the euro, leaving the dollar broadly stable.
On Tuesday, the ruble firmed to 40.38 per euro, its strongest since December 2008.
Against the dollar — which remains a key indicator for ordinary Russians and is also the chief currency for energy and commodities trade — the ruble only managed one-month peaks. It held in sight of them on Tuesday at 29.78.