Ruble Holds at One-Year Low Versus Dollar on Political Tensions

By Emma O'Brien

Sept. 4 (Bloomberg) -- The ruble fell to the lowest level in almost a year against the dollar as concern about Russia's intentions in the region spurred investors to sell the country's assets.

Investors have taken about $30 billion out of Russia since the start of its five-day war with Georgia on Aug. 8, with concern heightened by U.S. and European condemnation of the invasion and this week's split in nearby Ukraine's ruling coalition. Russian government bonds have fallen with the ruble as oil, the nation's biggest export, slipped 4.4 percent this week.

``Six weeks ago Russia was touted as a safe haven; now it's a pariah state,'' said Ian McCall, London-based director of Argo Capital Management, where he helps manage about $1 billion in emerging-market, including Russian, debt. ``When the bullets start flying people would rather head for the sidelines.''

The ruble headed for its biggest weekly drop against the dollar since the second week of August, slipping to 25.3012 per dollar by 1:50 p.m. in Moscow, the weakest since Sept. 18, 2007. It dropped to 36.6458 per euro, from 36.4287, and is set to slip 1.4 percent this week.

Bank Rossii, the central bank, keeps the ruble within a trading band against a currency basket to limit the impact of fluctuations on the competitiveness of Russian exports. It has been widening the band since mid-May to introduce volatility into the currency and prepare it for a free float by 2011. The basket rate is calculated by multiplying the ruble's rate to the dollar by 0.55, the euro rate by 0.45, then adding them.

Troops in Georgia

The ruble slid 0.6 percent to 30.3815 against the basket today, after weakening 1.3 percent yesterday, its biggest one-day fall since the mechanism was introduced in February 2005.

Russian peacekeepers are still in parts of Georgia, maintaining what the government describes as a buffer zone around South Ossetia and Abkhazia, the two Georgian separatist regions whose independence Russia recognized last month. The U.S. and the European Union have demanded Russian soldiers withdraw to their pre-war positions.

U.S. Vice President Dick Cheney met Georgian President Mikheil Saakashvili in the capital, Tbilisi, today. He said Russia's actions posed ``grave doubts'' about its intentions in the Caucasus and that the U.S. is still ``fully committed'' to Georgia's bid to join the North Atlantic Treaty Organization. Russia opposes Georgia's and Ukraine's NATO membership bids.

`Confidence Shaken'

The government alliance of Ukrainian President Viktor Yushchenko's party and Prime Minister Yulia Timoshenko split Sept. 2, amid allegations Timoshenko didn't condemn the Georgian invasion because she is seeking Russian support for a run at the presidency. French Foreign Minister Bernard Kouchner said last month Ukraine may be Russia's next ``target.''

``Confidence in Russian assets will remain shaken for some time,'' said Gaelle Blanchard, an emerging-markets currency strategist in London with Societe Generale. ``We don't expect a dramatic recovery in the ruble.''

Russian bonds fell. The yield on the benchmark 7.5 percent note due 2030 climbed 3 basis points to 5.77 percent. The 20-year bond yield rose 2 points to 5.64 percent. Yields move inversely to prices. The cost of protecting Russian sovereign debt from default rose 2 basis points to 148 today, the highest since March, according to CMA Datavision in London.

Crude oil is headed for its second straight weekly drop this week. It recently added 0.6 percent to $110.04 a barrel.

The ruble's decline is an ``echo of the large oil fall of the past couple of days,'' said Shahin Vallee, an emerging- markets currency strategist with BNP Paribas in London.

Traders said central bank bought the ruble when it fell to as low as 30.1084 against the basket on Aug. 11, the day before Russian President Dmitry Medvedev called off the Georgian offensive. The ruble's decline has been magnified by the triggering of stop losses on investor's long positions on the ruble, Argo's McCall said.

Bank Rossii has a policy of not commenting on day-to-day market operations, according to spokesman Vladimir Lavrov.

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