Russia's Ruble Is No `One-Way Bet,' UniCredit Says

By Emma O'Brien

Aug. 27 (Bloomberg) -- A bet the Russian ruble will strengthen is no longer a certainty and the currency may weaken at least another 1 percent against its dollar-euro basket as tensions with Georgia and falling oil prices deter investors, analysts at UniCredit SpA say.

The ruble has slumped almost 4 percent to the dollar since the five-day war started Aug. 7, extending declines yesterday after Russia recognized the independence of two breakaway regions of neighboring Georgia. Before the conflict, banks such as Merrill Lynch & Co. had predicted above-target inflation would force Russia to let the its currency strengthen by as much as 5 percent to the basket in the next 12 months.

``The escalation of political risks in Russia and the deterioration of investor sentiment may hasten the reversal'' of the ruble, UniCredit's Moscow-based analyst Vladimir Osakovsky said in a note to clients today. ``Ruble strength is no longer a one-way street.''

The ruble, which had gained more than 1 percent against the basket through by Aug. 7, is now at 29.8504, 0.7 percent weaker than its average basket price over the past 12 months. It rose 0.2 percent to 24.6102 per dollar by 5:45 p.m. in Moscow, and lost 0.3 percent to 36.2560 per euro, after sliding 0.2 percent yesterday.

Osakovsky says it could fall beyond 30.1084 to the basket, the 6-month low reached Aug. 11 before traders and investors said Russia's central bank started buying the currency to arrest its decline.

``It depends on the scale of the retaliation and if there's more military action,'' Osakovsky said in an interview. ``Likewise if the European Union or the U.S. imposes some kind of economic sanctions.''

Controlled Currency

By buying and selling rubles regularly, Bank Rossii contains the currency within a trading band against the basket, which is made up of about 55 percent dollars and 45 percent euros. It manages the ruble in order to limit the impact of its fluctuations on the competitiveness of Russian exporters.

The ruble dropped 2.4 percent against the dollar on Aug. 8, the day Russia sent in troops, tanks and warplanes in response to what it said were Georgian attacks against its peacekeepers and local citizens in the Georgian breakaway area of South Ossetia.

It fell to an almost seven-month low against the U.S. currency yesterday after President Dmitry Medvedev signed decrees recognizing the independence of South Ossetia and nearby Abkhazia, which broke away from Georgia in wars in the 1990s. Most of their citizens have Russian passports.

Crude oil's 18 percent decline from a record $147.27 a barrel on July 11 also diminishes one of the ``fundamental'' reasons for people to buy rubles and invest in Russia, the world's largest energy exporter, Osakovsky said.

Oil Slip

Oil's drop will probably erode Russia's $37 billion current- account surplus ``cutting support for the currency and breaking the long-term trend of ruble appreciation,'' he said.

Bank Rossii has allowed the ruble to trade more freely since mid-May when the bank said it would allow greater volatility in the ruble to prepare it for a free-float by 2011.

A strengthening currency also reduces prices on imported goods, helping to reduce Russian inflation, which was 14.7 percent in July, above the government's 11.8 percent target. Each 1 percentage point appreciation of the ruble can reduce inflation by 0.3 percentage points, according to the central bank's own calculations.

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