By Garfield Reynolds
Sept. 5 (Bloomberg) -- Investors should buy three-month call options on the ruble against the central bank's euro-dollar basket because the currency may rebound from a record low as Bank Rossii uses its $583 billion of reserves to curb declines, Morgan Stanley said.
The ruble slid 0.6 percent to 30.40 against the basket yesterday, after weakening 1.3 percent Sept. 3, its biggest one- day decline since the mechanism was introduced in February 2005. Bank Rossii, the central bank, monitors the ruble against a basket calculated by multiplying the ruble's rate to the dollar by 0.55, the euro rate by 0.45, then adding them.
Investors took $30 billion out of Russia since the Aug. 8 start of its five-day war with Georgia, according to BNP Paribas SA, with concern heightened by U.S. and European condemnation. The ruble should rebound against the euro and dollar once the central bank deploys its foreign-exchange reserves, the world's third-biggest, Morgan Stanley said. The Financial Times yesterday said Bank Rossii started selling dollars.
``The central bank has ample reserves and should be able to corral further ruble weakness,'' said Ronald Leven, a New York- based analyst at Morgan Stanley. ``With deviations from the government target basket at extremes and ruble carry advantage at multiyear highs, we believe it is attractive to go long via options.''
Call Options
Investors should purchase call options giving them the right to buy Russian rubles in three months at a similar price to the current spot market, Leven wrote in a client note dated yesterday. They should also sell call options of the same maturity at a strike price of 29.50 to reduce the cost of the bet, he said.
Call options give the buyer the right -- but not the obligation -- to buy an asset at a pre-agreed price on a set date. By selling a call option, the investor is taking a bet the contract won't be exercised, allowing them to keep as profit the premium paid for the option.
The trade offers a potential return of about 3 percent, Leven said. Investors are better putting their money into options because of the volatile political situation in the region, he said.
Russia's central bank sold as much as $4 billion in reserves yesterday to support the ruble as investors responded to Russia's war with Georgia, the Financial Times reported, citing unidentified currency dealers.
No Oil Link
The currency's declines weren't closely linked to the drop in prices for crude oil, Russia's biggest export earner. Morgan Stanley's Leven said. The ruble's exchange rates against the euro and dollar haven't fluctuated in line with oil for most of this year, he said. Russia is the world's second-biggest oil exporter.
The ruble headed for its biggest weekly drop against the dollar since the second week of August, slipping 3.4 percent to 25.4872 per dollar by 11:28 a.m. in Tokyo, from 24.6450 on Aug. 29. It reached 25.7209, the weakest since Sept. 11, 2007. It dropped to 36.4137 per euro, from 36.1628 late last week.
Bank Rossii keeps the ruble within a trading band against the 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.
Russian peacekeepers are still in parts of Georgia, maintaining what the government calls 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, yesterday. He condemned Russia's ``invasion'' of Georgia and said 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.
To contact the reporter on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net
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