Russian Stocks, Bonds Tumble as Central Bank Props Up Ruble

By Denis Maternovsky and Abigail Moses

Sept. 5 (Bloomberg) -- Russian stocks plunged and the cost to protect government bonds from default jumped to the highest in almost four years as the central bank shored up its currency pummeled by the conflict in Georgia and tumbling commodity prices.

The central bank said it intervened after the ruble fell to the lowest level in almost a year against the dollar yesterday. Russia's RTS Index dropped the most among 88 stock indexes tracked by Bloomberg today, capping its worst week since May 2006, and credit-default swaps on the government's debt rose 13 basis points to 165, the highest since November 2004, according to CMA Datavision prices.

Russia investors pulled out a net $4.6 billion since the invasion of Georgia last month, according to the central bank, contributing to the worst quarterly slump in shares since the government's debt default a decade ago. Russia, the world's biggest energy exporter and largest producer of nickel and palladium, was also hurt as crude oil slumped 7 percent this week to the lowest since April.

``They have to intervene because people are selling ruble assets and taking the money out of the country,'' said Nigel Rendell, senior emerging-markets strategist at Royal Bank of Canada Ltd. in London. ``In a time of uncertainty, I think it's a sensible move to get out of Russia. The political situation doesn't look good.''

The central bank is probably buying more rubles than at any time in recent years, possibly the most since 1998, Rendell said.

American Ally

The five-day war with Georgia brought Russia into conflict with one of the region's staunchest U.S. allies. Georgia is the third-largest member of the allied coalition in Iraq and part of a U.S.-backed ``southern energy corridor'' that connects the Caspian Sea region with world markets, bypassing Russia.

The ruble, which is kept within a trading band against a currency basket to limit the impact of fluctuations on the competitiveness of Russian exports, fell to as low as 25.4602 per dollar yesterday, the weakest level in a year.

The central bank in Moscow responded by selling a ``significant'' amount of foreign currency to prop up the ruble, First Deputy Chairman Alexei Ulyukayev said. ``The ruble had got to the higher end of the trading band, so it was reasonable,'' he told reporters in Sochi today, declining to give the exact amount.

The bank sold about $4.5 billion of foreign reserves yesterday, according to Mikhail Galkin, a fixed-income analyst at MDM Bank in Moscow.

The currency snapped three days of declines today, advancing to 30.3236 against the central bank's dollar-euro basket as of 1:15 p.m. in Moscow.

Goldman's Call

Goldman Sachs Group Inc. said today that investors should close their long ruble positions, or bets that the Russian currency will rise, based on 12-month non-deliverable forwards. The contracts oblige traders to exchange one currency for another at a set price and date in the future. Settlements are made in dollars.

Russia's RTS stock index fell 33 percent since July 1, the worst slump since the government defaulted on $40 billion of debt in August 1998, devaluing the ruble and crushing the banking system. The dollar-denominated index dropped 5.7 percent to 1,440.26, bringing its weekly slide to 12 percent. The ruble- denominated Micex Index also sank 5.7 percent to 1,209.4, the lowest since June 2006.

Ukraine Suspended

Neighboring Ukraine's PFTS Index was the world's second- worst stock index this quarter, falling 29.1 percent, as Russia's invasion of Georgia and the feud between President Viktor Yushchenko and Prime Minister Yulia Timoshenko shook investor confidence. Stock market trading was suspended today because of a 7 percent slump, according to Andriy Kolomiets, the spokesman for the PFTS Stock Exchange.

Credit-default swaps on Ukraine's government debt rose 25 basis points to a record 502, according to CMA Datavision.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality.

Five-year credit-default swaps on OAO Gazprom, Russia's largest company, increased 13.5 basis points to 298, the highest level since March, Bloomberg data show.

``There is a global risk aversion and an understanding that there will be new debt issued that will pay more than existing curves,'' said MDM's Galkin.

Shares of OAO Rosneft, the country's biggest oil producer, dropped as much as 8.8 percent and last traded at 191 rubles. OAO GMK Norilsk Nickel, Russia's biggest mining company, tumbled as much as 15.2 percent and was trading at 3,805 rubles.

Oil has fallen more than 7 percent this week, heading for its biggest weekly decline in a month, with crude for October delivery at $106.90 on the New York Mercantile Exchange. Nickel dropped $605 to $18,600 a metric ton.

To contact the reporter on this story: Denis Maternovsky in Moscow at dmaternovsky@bloomberg.net