OREANDA-NEWS. October 04, 2010. The ruble ended September trading at RUB35.4/basket, 2.5% down from its mid-month levels. Weakness in the currency countered recent upward movements in crude oil prices and Russia’s reserves. The latter posted their highest two-week gain of the year, growing by USD12bn from 10-24 September. Even if adjusted for EUR strength, the net gain in reserves stood at about USD4bn., reported the press-centre of OTKRITIE Financial Corporation.

 The puzzle of the weakening ruble can be explained in two ways: The first has to do with the fact that Russia’s key taxes are set in dollars, but are collected in rubles. This means that when large tax payments are due, if the USD rate falls, it could provoke significant falls in the nominal volumes of collected taxes. Given that the CBR has a long history of manipulating the ruble rate in the interests of tax collectors, we do not rule out that the same could have happened this time. The second explanation for this could be from a shift in the CBR’s currency policy, as a counter reaction to Russia’s shrinking trade balance. Weaker currency should help halt further growth in imports. But this also pushes import prices up and creates extra inflationary pressure.

Action: With inflation likely to reach the official annual target of 8% YoY by the start of next month, monetary authorities have little room to maneuver. Following the end of tax payment season yesterday, we think the ruble may now return to RUB34.5/basket levels, implying a 2%-3% appreciation potential in the next few trading sessions.