Ruble May Strengthen 3% by Year-End, Renaissance Says

By Emma O'Brien

Aug. 28 (Bloomberg) -- The ruble may gain 3 percent against its dollar-euro basket by the end of 2008 as high oil prices and Russia's current-account surplus offset investor concerns over the conflict with Georgia, Renaissance Capital analysts said.

The currency is set for its biggest monthly drop versus the basket since its introduction in 2005 as the five-day war with neighboring Georgia cause investors to sell Russian assets. The country's $38 billion current-account surplus and this year's 24 percent jump in oil prices will lure buyers back to the world's largest energy supplier, said Alexei Moiseev, head of fixed- income research.

``I don't see any way that the situation in Georgia will prevent Russia from exporting energy or affect the current- account surplus,'' Renaissance's Moscow-based Moiseev said. ``All the good fundamentals are still there.''

Russia's currency was at 29.8597 to the basket by 6:03 p.m. in Moscow, from 29.8483 yesterday. Bank Rossii, Russia's central bank, keeps the ruble within a trading band against the basket to limit the effect of its fluctuations on the competitiveness of local exports. The basket is made up of about 55 percent dollars and 45 percent euros.

The ruble gained 0.1 percent to 24.5774 per dollar today, and fell 0.2 percent to 36.3073 per euro.

The currency will probably end the year at 29 to the basket, Moiseev said, changing a previous year-end forecast of 29.40.

Stable Outlook

Oil and gas activities make up about 20 percent of Russia's gross domestic product and generate more than 60 percent of total export revenue, according to TD Securities Ltd.

Fitch Ratings is unlikely to change Russia's BBB+ debt rating, the third-lowest investment-grade ranking, or its ``stable'' outlook any time soon, Edward Parker, an emerging- markets credit analyst at Fitch in London, said in an interview.

The conflict with Georgia only adds ``a layer of political risk'' to investing in Russia, a country in its 10th year of economic growth and with the world's third-largest international reserves, Parker said yesterday.

As much as $25 billion of capital has flowed out of Russia since the start of the Georgia conflict on Aug. 7, analysts at BNP Paribas SA, France's largest bank, said in a note today.

Above-target inflation will also contribute to a stronger ruble, Moiseev said.

Bank Policy

Bank Rossii has been widening the ruble's trading band to the basket since mid-May to subdue price growth that was at 14.7 percent in July, compared with the government's 11.8 percent target. Each 1 percentage point increase in the ruble to the basket reduces inflation by 0.3 percentage point, according to the central bank's calculations.

A strengthening currency helps reduce prices on imported goods. While Bank Rossii has raised its key interest rates four times this year in a bid to halt gains in consumer prices, it isn't an effective way of controlling inflation in Russia because the country doesn't have a fully fledged consumer-credit market.

``The ruble will appreciate because they really have no other means to fight inflation,'' Moiseev said. The currency will gain ``as the dust settles over the coming weeks,'' he said.

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