Ruble Weakens After Georgia Says Russia Expanding `Occupation'

By Emma O'Brien

Aug. 21 (Bloomberg) -- The Russian ruble weakened against the dollar-euro basket used by the central bank to limit its fluctuations after Georgia's president Mikheil Saakashvili said Russia had widened its ``occupation'' of his country.

The ruble has lost almost 1 percent against the basket since since Aug. 7, when Georgia is alleged to have attacked Russian peacekeepers and citizens in the breakaway region of South Ossetia, prompting Russia to send in troops, tanks and jets the following day.

``We're seeing a small correction on the back of general ongoing tensions,'' said Jon Harrison, an emerging markets strategist at Dresdner Kleinwort in London. ``There are concerns it could escalate again and people are uncertain.''

The managed currency fell for the first day in four against the basket, losing as much as 0.3 percent. It was at 29.6123 by 4:04 p.m. in Moscow, from 29.5994 yesterday.

Bank Rossii confines the ruble to a trading band against the basket so as to limit the impact of its fluctuations on the competitiveness of Russian exports. The basket rate is calculated by multiplying the rate to the dollar by 0.55 and the euro rate by 0.45, then adding the two together.

The ruble fell as much as 0.3 percent to 24.4619 per dollar, and by 0.4 percent to 36.0982 per euro.

Georgian officials say Russia still controls a third of their country. Saakashvili said from the capital Tbilisi today that Russia ``has actually widened its occupation'' of the country, rather than make ``any serious movement to withdraw'' as demanded by a cease-fire agreed last week. Russian troops still hold all entrances to the city of Gori, Shota Utiashvili, a spokesman for Georgia's Interior Ministry, said today.

Moscow, which yesterday decided to ``freeze'' all military cooperation with NATO, has begun pulling out missiles, tanks and troops from central Georgia, Russia's Defense Ministry said.

Wider Band

Since mid-May Russia's central bank has allowed the ruble to trade more freely and widened its trading band as it seeks to deter speculative investors and curb above-target inflation. A strengthening currency cuts prices on imported goods and each 1 percentage point appreciation of the ruble can reduce inflation by 0.3 points, according to the bank's calculations.

The ruble will probably end the year stronger as Bank Rossii allows it to rise to cool inflation, Alfa Bank analysts led by chief economist Natalia Orlova said today.

``We think the central bank will appreciate the basket again so now is a good time to open long positions in the ruble,'' the Alfa analysts wrote. A long position is a bet the currency is going to strengthen. The central bank's ``continuing talk of inflation-targeting and the need to finance investments suggest that the currency will strengthen,'' the note said.

Bonds Fall

Inflation, which slowed to 14.7 percent in June from a five- year high of 15.1 percent in May and June, must be less than 10 percent next year, Prime Minister Vladimir Putin said today.

Russia's benchmark 7.5 percent bond due in 2030 fell today, as its yield rose by 2 basis points to 5.65 percent. The two-year note yielded 5.88 percent, up 8 basis points. The difference in yield between Russian and U.S. two-year notes was 363 basis points, the widest since March.

The yield on Georgia's 7.5 percent note due in 2013 held at 10.17 percent yesterday, after the central bank of Georgia cut its key interest rate to 11 percent, from 12 percent, in a bid to lure investors and reignite the economy after the war. It has jumped 1.67 basis points since Aug. 7.

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