Ruble Jumps Most Since 1999 as Central Bank Curbs Speculators

By Emma O'Brien

Oct. 20 (Bloomberg) -- The ruble rose the most against the dollar in more than nine years and Russian stocks and bonds rallied after the central bank curbed speculators betting on the currency's decline.

The ruble strengthened against the dollar and the euro after Bank Rossii limited the amount traders can wager through currency swaps, which allow investors to make bets on the exchange rate without having to convert currency upfront. The Micex Index of shares climbed as much as 6.6 percent, and the yield on the benchmark 30-year government bond retreated from a six-year high as the price of oil, Russia's biggest export earner, rose for a second day.

``They're trying to defend the ruble with tooth and nail, though it remains to be seen whether they'll be successful,'' said Peter Westin, a strategist in Moscow with JPMorgan Chase & Co., the largest U.S. bank by market value. ``We have global momentum and strength with the oil price up and that's helping Russia today.''

The central bank will announce a limit on traders' currency-swap operations every day by 10 a.m. in Moscow, it said today in an e-mailed statement. Today's limit is 50 billion rubles ($1.9 billion).

The new policy will prompt banks betting on a ruble decline to reverse those trades, said Mikhail Galkin, head of fixed- income and credit research at MDM Bank in Moscow.

The currency, which the central bank seeks to keep within a trading band against a basket of dollars and euros, rose as much as 1.8 percent to 25.8838 per dollar today, the biggest gain since May 17, 1999. It was at 26.3135 by 4:53 p.m. in Moscow, from 26.3566 last week. The ruble climbed as much as 1.2 percent to 34.9330 per euro, from 35.3415.

Those gains pushed the ruble 0.1 percent higher against the dollar-euro basket to 30.3642.

Citigroup, Goldman

Citigroup Inc. and Goldman Sachs Group Inc. predicted last week the ruble would weaken as much as 5 percent in the next year as investors keep pulling funds out of the country and the price of oil declines.

The ruble slid to a 20-month low versus the dollar on Oct. 16 and the Micex lost 9.1 percent, as Urals crude, Russia's main export blend, fell below $70 a barrel for the first time in more than a year and the global credit crisis dried up lending among Russian banks. Prices dropped to as little as $66.62 a barrel, below the average price needed to balance Russia's budget next year.

BNP Paribas SA, France's largest bank, also advised clients to ``short the ruble,'' according to an e-mailed note today. A short position is a bet that an asset price will fall. JPMorgan said last week the ruble may drop to as low as 32 versus the basket by year-end and 33.40 by the end of 2009.

`Paying With Blood'

``They are paying with their blood for their mistakes,'' said Evgeniy Nadorshin, a senior economist at Trust.

Urals prices had jumped more than fivefold to a July record of $143 since May 2000, when current Prime Minister Vladimir Putin officially succeeded Boris Yeltsin as Russia's president.

Crude rose 2.3 percent to $73.49 a barrel on the New York Mercantile Exchange today.

Russia's foreign-currency reserves, the world's third- largest, shrank by $15.1 billion to $530.6 in the five days to Oct. 10 as Bank Rossii sold dollars to support the ruble. The bank manages the ruble against a basket to prevent currency fluctuations from hurting the competitiveness of exports. The basket rate is calculated by multiplying the ruble's rate to the dollar by 0.55, the euro rate by 0.45, and adding them together.

``If the ruble was to dramatically weaken it would hurt corporate and financial funding costs and lead to a deterioration of household sentiment,'' said Martin Blum, head of emerging market economics and currency strategy at UniCredit in Vienna. ``The average Joe on the street isn't looking at the basket rate, he's looking at where the ruble is to the dollar.''

Bonds Advance

Russian government bonds rose, with the yield on the 7.5 percent bond due 2030 falling 3 basis points to 10.25 percent. The extra yield investors demand to hold two-year Russian notes over U.S. Treasuries of similar maturity narrowed 21 basis points to 390 points today.

The Micex gained 2 percent to 611.80 and the dollar- denominated RTS Index also snapped three days of declines, rising 4.5 percent to 697.49. Markets were led higher by oil producers, including OAO Gazprom Neft and OAO Lukoil.

Gazprom Neft, the oil arm of Russian gas monopoly OAO Gazprom, climbed 1.80 ruble, or 4.2 percent, to 44.82 rubles, while Lukoil, the country's biggest independent crude producer, gained 43.17 rubles, or 5.2 percent, to 870.98 rubles. OAO Novatek, Russia's second-largest natural-gas producer, added 3.33 rubles, or 4.1 percent, to 85.54 rubles, after the nation's gas prices increased by 0.7 percent at an Oct. 15 auction on the Electronic Trading Platform-000 Mezhregiongaz.

Russia's MosPrime rate, the average interest Russian banks charge to lend money to each other, surged to a record 21 percent today, from 9.83 percent on Oct. 17. Lenders are retaining their cash as 200 billion rubles ($7.7 billion) in value-added tax comes due today, said Vladimir Tikhomirov, chief economist in Moscow for UralSib Financial Corp. in Moscow.

``Banks are scrambling for cash to pay VAT on behalf of their clients,'' he said. ``We have a liquidity crisis because of the global situation which makes it more difficult when big payments are due.''

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