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By Bloomberg

Russian central bank Governor Elvira Nabiullina is flushing out the ruble speculators, and the result is the best week for the currency in more than two years.

For the second week running, hedge funds and other speculators pared bets the ruble will weaken versus the dollar, with net short positions cut to 3,599 on Nov. 18 from 4,075 on Nov. 11, according to the Commodity Futures Trading Commission. The currency gained every day last week, the first time that’s happened in six months, with the 3.2 percent advance the most since September 2012, according to data compiled by Bloomberg.

The squeeze on short-sellers followed Nabiullina’s steps on Nov. 10 to end the central bank’s previous intervention policy, bringing forward plans to float the ruble and restricting access to local-currency funds. At the same time, the strategy has helped boost borrowing costs, another headwind for an economy already stung by higher interest rates, tumbling oil prices and the impact of sanctions over the Ukraine conflict.

“Speculators are exiting the market in the wake of the actions taken by Nabiullina,” Vladimir Osakovskiy, the chief economist for Russia at Bank of America Merrill Lynch in Moscow, said by phone Nov. 20. “The ruble is again being driven by fundamentals, first and foremost by the price of oil. If it goes up, the ruble also has a chance to strengthen.”

Net short positions had increased for six weeks in a row to 6,182 in the week ended Nov. 4, the most since the Washington- based CFTC began providing data in 2009.

Panic Demand

Under the weight of slowing growth, sanctions imposed in response to Russia’s role in the Ukraine conflict and the sliding price of oil, the ruble fell to a record 48.6495 per dollar on Nov. 7. Brent posted its first weekly gain in two months last week.

While most emerging currencies weakened this year, with the index of the 20 most-traded declining 7.2 percent, the ruble underperformed its peers, tumbling 33 percent to the Nov. 7 intraday low.

“The ruble has plunged to levels far from the fundamentals,” Yury Tulinov, the head of research at OAO Rosbank, Societe Generale SA’s Russian unit, said by phone from Moscow on Nov. 20. “I don’t think anyone thinks the 48 ruble- per-dollar is justified by any reason apart from panic demand.”

Russia’s Response

The Bank of Russia countered the currency’s decline by raising interest rates, increasing the cost of betting against the ruble. The bank’s key rate, the cost of a one-week collateralized loan, has risen an aggregate 400 basis points since the beginning of the year to 9.5 percent.

The weaker currency drove annual inflation to 8.8 percent in the week ended Nov. 17 by raising prices of imported goods, Daria Isakova, an economist at Otkritie Capital in Moscow, said by phone Nov. 19. The central bank had targeted 5 percent inflation this year.

Nabiullina also let the ruble float freely months ahead of target after spending $90 billion of its gold and foreign- currency reserves, to massage the currency’s slide. The bank on Nov. 10 stopped rules-based interventions in favor of selling or buying currency only to avert threats to financial stability.

“The drop to these levels may have become a reason to exit trades for many funds, who had opened them as long as two years ago, when it was still at 30” per dollar, Rosbank’s Tulinov said. “Now the ruble has become freely floating and has priced in a lot of negative factors, it makes sense to close the trade.”

Speculators Shakeout

The central bank on Nov. 12 began limiting the provision of ruble liquidity to commercial banks through swaps operations as some lenders were using the rubles to immediately buy dollars. Concerns about the refinancing policy drove the three-month MosPrime rate to 12.23 percent on Nov. 21, the highest since July 2009. The spread to the key rate widened to 273, just 24 points away from the most on record.

That’s equivalent to “a further rate increase of 100 basis points,” said Osakovskiy from Bank of America. “This is of course supportive for the ruble but very negative for the economy.”

Russia may sink into a recession next year if the price of oil slumps to $60 a barrel and the U.S. and its allies tighten sanctions, Finance Minister Anton Siluanov said Nov. 18.

The European Union avoided imposing new sanctions at its latest meeting on Nov. 17. Brent crude ended last week at $80.36 a barrel, bouncing back from the lowest close in four years on Nov. 13. The ruble gained 1.3 percent to 45.1380 per dollar at 10:08 a.m. in Moscow.

“The ruble has become oil’s closest sibling,” Vladimir Miklashevsky, a strategist at Danske Bank A/S, said by e-mail Nov. 20. “Your view on the ruble to a large extent is your view on oil.”