Ruble Drops Against Basket as Georgia Says Russia Bombed Towns

By Emma O'Brien

Aug. 8 (Bloomberg) -- Russia's ruble fell the most in 2 1/2 years against the dollar-euro basket used by policy makers to limit its movements, as concern Russia is headed for a war with neighboring Georgia deterred investors.

The currency also slipped by the most in 18 months versus the dollar after the Georgian Interior Ministry said Russian fighter jets bombed two towns in the former Soviet republic near the breakaway region of South Ossetia, intensifying the dispute over the area.

``There are concerns regarding the conflict in South Ossetia,'' said Stanislav Ponomarenko, head of research in Moscow at ING Bank NV. ``This could be scaring some investors from Russia a bit and they're selling rubles.''

The ruble weakened as much as 0.8 percent against the basket, the most since January 2006, and was at 29.4694 by 1:15 p.m. in Moscow, from 29.3585 yesterday. It is headed for a 0.4 percent drop in the week.

Against the dollar, the ruble dropped by as much as 1.3 percent to 23.9962, and was at 23.9092, from 23.6833, leaving it 1.8 percent lower in the week. It was also at 36.27438 per euro, from 36.2947 yesterday and 36.5538 on Aug. 1.

Russian Prime Minister Vladimir Putin told reporters in Beijing that ``countermeasures'' would be taken to deal with what he called Georgia's ``aggression'' after peacekeepers were attacked. He didn't elaborate.

Interfax news service later reported that Georgian forces shelled a Russian barracks in South Ossetia, killing an unknown number of soldiers. Russia's government denied the bombing claim and the Defense Ministry accused Georgia of ``unleashing a dirty, reckless scheme.'' NATO Secretary General Jaap de Hoop Scheffer called on ``all sides'' to end hostilities ``immediately.''

Regional Tensions

South Ossetia broke away from Georgia in the early 1990s and now exists as a de facto independent state with Russian peacekeepers and economic support. The U.S. ally that wants to join the North Atlantic Treaty Organization has accused Russia of stoking tensions in the region.

``Traders say there is demand from non-residents for dollars now,'' said Evgeniy Nadorshin, a senior economist in Moscow at Trust Investment Bank, which ranks itself among the top 50 traders of ruble in the world.

Russia's benchmark Micex stock index fell as much as 2.6 percent, snapping a two-day advance.

`Long Positions'

Slowing inflation may also be encouraging some investors to unwind so-called long positions on the ruble, or bets it will gain, Ponomarenko said. The inflation rate fell to 14.7 percent in July, from a 5 1/2-year high of 15.1 percent in May and June.

Russia's central bank controls the ruble against the basket in order to limit the impact of any fluctuations on the competitiveness of local exports. The basket rate is calculated by multiplying the rate to the dollar by 0.55, the euro rate by 0.45 and then adding the two together.

Investors should use the ruble's weakness this week to put on long positions, Ponomarenko said today. ``This ruble weakness will be temporary and we see it as a chance to buy.''

Russian government bonds were mixed. The benchmark 30-year note yielded 5.65 percent, up 4 basis points. The yield on the two-year 8.25 percent bond fell 5 basis points to 5.62 percent. The difference in yield between Russian and U.S. two-year notes narrowed to 318 basis points, from 324 yesterday.

To contact the reporter on this story: Emma O'Brien in Moscow at eobrien6@bloomberg.net