Ruble Drops to One-Year Low Against Dollar as Stocks Decline

By Emma O'Brien

Sept. 10 (Bloomberg) -- The ruble dropped to its lowest level in more than a year against the dollar as stocks dropped for a second day after a report showed economic growth slowed in the second quarter.

The currency weakened as the Micex stock index slid 5.3 percent. Investors pulled about $113 million out of Russia in the two weeks to Sept. 3 following oil's slump from a record and the country's five-day war with Georgia, according to Alfa Bank. Economic growth slowed to 7.5 percent in the three months through June, from 8.5 percent in the first quarter, the Federal Statistics Service said today.

``The world has changed the way it looks at Russia and that's resulting in a stock market under pressure and the flow side of the story not being as positive as it used to be,'' said Lars Rasmussen, an emerging-markets analyst in Copenhagen at Danske Bank A/S, whose subsidiary the Helsinki-based Sampo Bank Plc is among the top five traders of the ruble in the world. ``The prospects for the ruble have deteriorated.''

Russia's currency dropped to 25.6423 per dollar, the lowest level since Sept. 7, 2007, before trading at 25.6321 by 2:22 p.m. in Moscow. It was little changed at 36.1572 per euro, from 36.1597 yesterday.

Bank Rossii, Russia's central bank, buys and sells the ruble regularly to keep it within a trading band against a basket made up of dollars and euros to limit fluctuations that hurt the competitiveness of Russian exports.

The ruble held at 30.3723 versus the basket today, from 30.3431 yesterday. 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.

Central Bank Sales

The currency has weakened about 2.3 percent against the basket since Russia invaded Georgia on Aug. 8, sliding to 30.4045, its lowest closing price in more than two years, on Sept. 4. Bank Rossii First Deputy Chairman Alexei Ulyukayev said a day later that the bank sold a ``significant'' amount of foreign currency to arrest the ruble's slide.

``Worries over Russia's domestic economy'' will dog equities, analysts led by Peter Weston at JPMorgan Chase & Co. in Moscow wrote in a note today, reiterating its ``underweight'' recommendation on the country's stocks.

The dollar-denominated RTS index slid 4.5 percent today, after dropping 7.5 percent yesterday.

Bank Rossii has been expanding the ruble's trading band to the basket since mid-May to deter speculators from betting above-target inflation will force them to let the ruble appreciate this year. The central bank has no plans to expand the ruble's current trading band to the basket ``over the coming months,'' Ulyukayev said two days ago.

Credit Suisse Goes Long

Investors should reinstate long positions on the ruble, or bets it's going to rise, because of Ulyukayev's comments, Credit Suisse Group analysts led by Kasper Bartholdy in London wrote in a client note yesterday. ``The downside for the ruble is limited,'' the analysts wrote.

Russian bonds dropped, with the yield on the benchmark 7.5 percent note due 2030 gaining 6 basis points to 5.89 percent. The two-year note yield advanced 14 basis points, to 6.16 percent, the biggest jump since Aug. 8. The difference in yield between Russian and U.S. two-year debt was at 392 basis points today, the widest since March.

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