WHILE its Bric counterparts of Brazil, India and China have been relatively unaffected by the global downturn, the Russian economy has suffered more than most. With approximately 60 per cent of its exports dependent on oil, a slump in the crude price during the second half of 2008 proved disastrous.<br /><br />But a recovering oil price and a general revival in the world economy fuelled strong growth of 13.9 per cent in Russia during the third quarter of 2009. Although the recovery remains fragile, an improving economic outlook is making investors far more confident about the region, with the central bank reporting an increase in capital inflows so far this month.<br /><br />This better outlook has helped push the rouble to fresh 2009 highs of 35.09 roubles to its euro-dollar basket (55 per cent dollars; 45 per cent euros). The currency has risen by more than 8.5 percent against this basket since its rally began in early September. The rouble has now recovered around half of the losses it incurred during gradual depreciation a year ago.<br /><br />But this strong rise in the rouble has concerned Bank Rossii, the Russian central bank, despite its aim to move to a free float over the next three years. Bank Rossii has spent over $5bn in the currency markets since the start of the month to slow the rouble’s rally and ensure the currency remains firmly within the central bank’s trading range of 26 to 41 roubles. It also spent about $15bn last month in the foreign exchange markets to keep the rouble at desirable levels. <br /><br />Last week Bank Rossii shifted its intervention bid level to 35.15 roubles per euro/dollar basket, down five kopecks (0.05 roubles) from the previous level, while warning the market that the currency will not always move one-way. <br /><br /><strong>YIELD DIFFERENTIAL</strong><br />Sergei Shvetsov, the head of the central bank’s open market operations department, said that dollar-funded carry trades were putting upward pressure on the rouble.<br /><br />The central bank has reduced the refinancing rate by 350 basis points since April to 9.50 percent to help stimulate the economy, but carry traders are taking advantage of the massive yield differential between Russia and many of the major economies, which still have interest rates of 1 per cent or lower, where they are expected to remain for some time. <br /><br />Danske Bank analysts reckon that we could see some increased volatility in the rouble around the new year when fiscal spending plans will be accelerated. But they also note: “As long as oil prices are high and risk appetite present we do not expect the rouble to weaken significantly.”<br /><br />But over the medium-term (the next six to 12 months) they think that the combination of easy fiscal and monetary conditions and an expensive currency, in real terms, could drive the rouble a little weaker. Russia may yet cut interest rates further before the end of this year.<br /><br />If you want to trade the rouble as a private investor it’s far from easy. There is not much choice in terms of providers and just a few are offering pairs with the euro and the dollar. <br /><br />One of them is Saxo Bank, which offers both the euro-rouble and dollar-rouble pairs but only between 8am and 3pm Central European Time Monday to Friday. However the initial margin requirement is 8 per cent for both pairs, compared to 2 per cent for the biggest currencies, indicating the increased risk of the trade and the relatively low liquidity of these rouble pairs. <br /><br />It might be a risky currency to get involved in, but the Russian central bank is increasingly more tolerant of volatility in the currency market. <br /><br />This may well provide opportunities for foreign exchange traders to capitalise on movements in the currency as well as look to put on some carry trades of their own.