By Laura Cochrane and Emma O'Brien
Nov. 11 (Bloomberg) -- Russia's ruble fell the most in two months and stocks tumbled after the central bank said it may scale back its defense of the currency as officials grapple with the worst financial crisis since the 1998 devaluation.
The ruble slumped 1 percent against a basket of dollars and euros after central bank chairman Sergey Ignatiev said the currency has a ``tendency toward weakening,'' during a televised press conference yesterday. Russia's Micex Index plunged 10 percent, the biggest decline worldwide today.
``They're going to move the line in the sand back a little bit, where they hope they can defend it,'' while resisting a formal devaluation that would erode confidence in ruble deposits, Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow, said in an interview today. ``If people start to lose confidence in the banking system, we could have a massive run on the banks as we saw twice in the nineties, and then the game is up.''
Fitch Ratings yesterday followed Standard & Poor's in warning of a possible Russian downgrade after the central bank used 19 percent of its currency reserves to stem a 16 percent slide in the ruble against the dollar since the start of August. Financial turmoil has forced the country's largest oil and steel producers to seek tax breaks, while the defense industry is failing to meet government orders.
Russia, the world's second-largest oil producer, is suffering among the worst losses in financial markets as the global economic slowdown crimps demand for its exports. Russian stocks fell 67 percent this year, compared with a 42 percent slide in the MSCI World Index of developed nations.
Government Support
Crude fell as much as 3.4 percent in New York today, extending its decline to 59 percent from a July record, on speculation the International Energy Agency may lower its 2009 oil-demand forecast. Urals crude, Russia's main export blend of oil, has slumped 61 percent to $54.70.
If oil falls below a ``psychologically important'' $50 a barrel, pressure on the ruble will intensify, Weafer said.
The ruble, which Bank Rossii manages to limit the effect of fluctuations on the competitiveness of exports, slid as much as 1.3 percent against the dollar and 1 percent versus the euro.
``This has put fear into the market,'' said Lars Christensen, head of emerging-market research at Danske Bank A/S in Cophenhagen. ``It may lead to domestic Russian players leaving the ruble, triggering panic-selling.''
The central bank has a policy of not commenting on its day- to-day actions in the currency market and didn't immediately respond to questions faxed to the press department.
Deficit
Troika Dialog, Russia's oldest investment bank, said last week the decline in oil may drive the ruble as much as 30 percent lower against the basket that the central bank uses to peg the currency. Igor Yurgens, head of the Institute of Contemporary Development, which advises President Dmitry Medvedev, told Ekho Moskvy radio station today that the government won't allow a ``significant'' depreciation.
OAO Severstal and Evraz Group SA led five steelmakers pushing for government support including tax breaks, Vedomosti reported last month. Oil companies are also discussing tax breaks with the government, Interfax reported today, citing Energy Minister Sergei Shmatko. Deputy Prime Minister Sergei Ivanov said on state TV today that defense companies are facing difficulties in meeting orders from the government because of the global credit crunch.
OAO Magnitogorsk Iron & Steel said today it cut fourth- quarter spending by 40 percent.
Goldman Sachs Group Inc. economist Rory MacFarquhar in Moscow warned today that Russia faces a current account deficit. The country had a current-account surplus of $91.2 billion in the first nine months of this year.
-- With reporting by Ken Prewitt in New York. Editor: Gavin Serkin, Justin Carrigan
To contact the reporter on this story: Laura Cochrane in London at lcochrane3@bloomberg.netEmma O'Brien in Moscow at eobrien6@bloomberg.net
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