Ruble Weakens a Fifth Day Against Dollar on Devaluation Concern

By Emma O'Brien

Oct. 21 (Bloomberg) -- Russia's ruble weakened for a fifth straight day against the dollar on speculation banks and companies are converting funds borrowed from the government into foreign exchange on concern the currency will be devalued.

The ruble fell the most in more than a week against the central bank's dollar-euro basket as Citigroup Inc. and Goldman Sachs Group Inc. reiterated their forecast for the currency to depreciate by as much as 5 percent in the next 12 months. Bank Rossii yesterday restricted the use of currency swaps, which allow traders to bet on the ruble's decline without converting currency upfront.

``Banks or companies receiving liquidity prefer dollar to ruble because they think the dollar's safer and the ruble may be devalued,'' said Stanislav Ponomarenko, chief economist at ING Bank NV in Moscow. The central bank provided about 400 billion rubles ($15 billion) of loans to banks yesterday, he said.

The ruble lost as much as 0.8 percent to 26.5811 per dollar, and traded at 26.5560 by 3:28 p.m. in Moscow, from 26.3608 yesterday. It rose 0.2 percent to 35.1034 per euro, from 35.1659.

Bank Rossii keeps the ruble within a trading band against the currency basket to limit the effect of its movements on the competitiveness of Russian exports. 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 together.

The currency slid 0.3 percent to 30.4022 against the basket, from 30.3231 yesterday, when it rose 0.3 percent.

State Loans

Russia's government has pledged more than $200 billion in loans to banks, cash auctions and tax breaks as the country grapples with its worst financial crisis since defaulting on $40 billion of sovereign debt in 1998.

Companies and banks already have applied for almost $100 billion in loans from state development bank Vnesheconombank to help them refinance debt, Chairman Vladimir Dmitriev said today in comments confirmed by VEB's press service after they were reported by Interfax.

``It's leading to demand for dollars,'' Ponomarenko said.

Concern the central bank will devalue the currency pushed the ruble-dollar rate at Moscow money changers to as high as 27 rubles over the weekend, according to Vedomosti newspaper. BNP Paribas SA advised clients to bet on ruble declines against the dollar. JPMorgan Chase & Co. predicted last week the currency will fall as low as 32 against the basket by yearend.

`No One-Way Bet'

Should oil prices stabilize below $60 a barrel over the next 18 months, Russia's current-account may slip into deficit, from a surplus of $91.2 billion, Neil Shearing, an emerging- markets economist in London at Capital Economics Ltd. said in a research note yesterday. That may cause a 6 percent drop in the ruble against the dollar by the end of next year, he said.

``The fundamentals underpinning the ruble are not as strong as they were a few months ago,'' Shearing said in an interview today. ``It's no longer a one-way bet.''

ING said it's considering reducing its forecast for the ruble because the declining oil price may reduce the current- account surplus to zero, Ponomarenko said. Goldman's prediction is based on an average oil price next year of $85 a barrel.

Oil dropped 1.6 percent to $73.10 a barrel in New York trading today. The country's 2009 budget will stay in surplus providing the average price for Urals crude, Russia's export blend, remains above $70 a barrel in the year. Urals has been below $70 a barrel since Oct. 15.

Depleted Reserves

Russia has no plans to devalue the ruble, Interfax cited Deputy Finance Minister Sergei Shatalov as saying today. Kommersant newspaper reported yesterday Bank Rossii may devalue the currency by as much as 10 percent, citing an unidentified economist at the bank.

Bank Rossii bought $100 million yesterday to curb swings in the ruble exchange rate and replenish international reserves, according to Mikhail Galkin, head of fixed-income and credit research at MDM Bank in Moscow.

The bank has sold at least $27 billion of its foreign- currency reserves since Aug. 1, according to MDM, to prevent the ruble from dropping beyond 30.40, a level regarded by analysts as the weakest end of the trading band. Reserves declined 11 percent since a record $597.5 billion in the week to Aug. 8, the day Russia sent forces into Georgia.

Government bonds rose for the first time in five says, with the yield on the 7.5 percent bond due 2030 falling 22 basis points to 10.1 percent. The yield on the 8.25 percent bond maturing 2010 declined 12 basis points to 5.48 percent. The extra yield investors demand to hold two-year Russian notes over U.S. Treasuries of similar maturity narrowed 11 basis points to 380 points today. Bond yields move inversely to prices.

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