Ruble Poised for Biggest Monthly Drop Against Dollar Since 1999

By Emma O'Brien

Oct. 31 (Bloomberg) -- Russia's ruble weakened against the dollar and headed for its biggest monthly decline in more than nine years as the global credit crunch reduced demand for emerging-market assets.

Investors took $72 billion out of Russia in October, according to BNP Paribas SA, sending the Micex Index 31 percent lower and pushing the yield on the 30-year government bond to a seven-year high. A decline in crude oil spurred banks such as Citigroup Inc. to predict the ruble will be devalued. Three- month dollar-to-ruble derivatives rose to the highest in 5 1/2 years as traders sought protection from currency volatility.

``Investors were in a total panic in October, and emerging- market currencies worldwide suffered,'' said Evgeniy Nadorshin, a senior economist at Trust Investment Bank in Moscow. ``People saw it as a global economic crisis, the end of the world, and they were trying to sell everything for dollars because it's seen as a safer haven.''

Russia's currency, which the central bank manages against a basket of dollars and euros, weakened 1 percent to 27.0840 per dollar at 2:58 p.m. in Moscow, from 26.8281, bringing its decline this month to 5.6 percent, the most since March 1999. It rose 0.4 percent to 34.5372 per euro, from 34.6572 yesterday, and is 4.7 percent stronger this month.

Bank Rossii, the central bank, buys and sells foreign- currency reserves to keep the ruble within a trading band against the basket. The mechanism comprises about 55 percent dollars and 45 percent euros and is used to protect the competitiveness of Russian exports from currency swings. The ruble was little changed against the basket at 30.3928 today, from 30.3512 yesterday and 30.3675 at the end of September.

Record Sales

The dollar strengthened against all but two of the 26 developing-nation currencies tracked by Bloomberg this month as the International Monetary Fund approved a lending program that almost doubles borrowing limits for emerging markets and waives demands for economic austerity measures.

Russia's government has pledged more than $200 billion to replenish liquidity and bolster companies as the nation experiences its worst financial crisis since it defaulted on $40 billion of sovereign debt in 1998. The Micex slipped 2.5 percent today, while the dollar-denominated RTS Index fell 0.2 percent, extending its October decline to 38 percent, the biggest monthly drop since August 1998.

Bank Rossii sold $40 billion throughout October to prevent the ruble from weakening beyond 30.40 to the basket, a monthly record, said Nadorshin, who predicts the ruble will be steady against the basket for the rest of the year. The 30.40 level is regarded by most analysts, including those at BNP and Citigroup, as the weaker end of the basket band. The central bank doesn't comment on its actions in the currency market.

Spooking Speculators

Goldman Sachs Group Inc., Danske Bank A/S and JPMorgan Chase & Co. joined Citigroup in forecasting the ruble may fall by as much as 5 percent versus the basket next year, as dropping oil prices erase Russia's $91.2 billion current-account surplus. Arkady Dvorkovich, an economic aide to President Dmitry Medvedev, said on Oct. 29 that devaluation ``won't happen,'' echoing Finance Minister Alexei Kudrin's comments last week.

The central bank declined for a second day to offer currency swaps, in which traders are permitted to bet on the exchange rate without having to sell rubles upfront. Bank Rossii warned banks yesterday against increasing the amount of foreign exchange they hold above the average level held from Aug. 1 to Oct. 25, according to a statement on its Web site.

Bonds Advance

Net capital outflow from Russia was $26 billion last month because of ``the growth of the banking sector's net foreign assets,'' central-bank chief Sergey Ignatiev told lawmakers. The real rate, which measures the ruble against the currencies of its 18 major trading partners adjusted for inflation, may rise as much as 4.5 percent this year, Ignatiev said. The bank will allow a ``more flexible'' ruble, he added.

Three-month non-deliverable forward contracts, used by traders to speculate on the currency, had the ruble at 29.83 per dollar today, near the weakest since April, 2003. NDFs are contracts used to fix a currency at a particular level at a future date. They are employed by companies seeking to protect against foreign-exchange fluctuations.

The benchmark 7.5 percent dollar-denominated security maturing in 2030 yielded 10.15 percent, up 2 basis point, or 0.02 percentage point, from yesterday, and up 293 points in October. The yield on the 8.25 percent note due in 2010 gained 7 basis points today and 68 points in the month to 6.44 percent. Bond yields move inversely to prices.

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