Russia Debt Risk Jumps After `Clumsy' Ruble Widening, Rate Rise

By Denis Maternovsky and Bradley Cook

Nov. 12 (Bloomberg) -- The cost of protecting against a default by Russia soared after the central bank increased the ruble's trading band and lifted its benchmark interest rate to stem record capital outflows.

Credit-default swaps on Russian government bonds jumped to 7.87 percent of the amount insured from 6.14 percent yesterday, according to CMA Datavision prices. The yield on its 30-year dollar bonds increased to 10.77 percent from 9.1 percent, according to Bloomberg prices.

The central bank's widening of its ruble target against a basket of dollars and euros by 1 percent yesterday ``achieved nothing'' and cost almost $7 billion of the nation's foreign- currency reserves, according to analysts at Renaissance Capital. Russia joins Hungary, Iceland and Pakistan among a handful of central banks raising interest rates to stem currency losses, as the rest of the world cuts the benchmarks to spur lending.

``The current pressures have largely been provoked by the central bank itself, whose recent clumsy steps in the currency market triggered a new speculative attack on the ruble,'' analysts led by Alexei Moisseev at Renaissance in Moscow said in a report today.

Russia has drained more than 20 percent of its currency reserves, the world's third largest, to stem a 15 percent slide in the ruble against the dollar since the start of August as investors withdrew about $147 billion, according to BNP Paribas SA data to Nov. 10.

Fitch Ratings and Standard & Poor's said they may downgrade the nation's debt because the slide in reserves. The total at $484.7 billion remains more than double the combined international reserves of the eurozone nations.

Damaged Confidence

The ruble slid 1 percent yesterday, the most in two months, after the central bank indicated it would scale back its defense of the currency as officials grapple with the worst financial crisis since the 1998 devaluation. The ruble was 0.02 percent lower against the basket, comprised of about 55 percent dollars and 45 percent euros, at 30.7079 at 2:46 p.m. in Moscow.

Stock market regulators suspended the Micex Index after a 13 percent plunge in the ruble-denominated benchmark yesterday, the biggest decline worldwide. The dollar-denominated RTS Index fell 13 percent today. The MSCI Emerging Markets Index fell 1.4 percent to 551.55.

``The central bank's decision to devalue yesterday badly undercut confidence in the currency,'' said Ronald Smith, chief strategist at Alfa Bank in Moscow.

Oil Shock

Investors are selling Russian assets as a 60 percent slump in the price of oil since July cuts the revenue from the country's biggest export. Crude oil for December delivery fell as much as 1.3 percent to $58.55 a barrel in electronic trading on the New York Mercantile Exchange, a 20-month low, on evidence that a looming global recession is weakening demand.

Oil prices next year will probably average $50 a barrel, rising to $55 in 2010 and $60 in 2011, Russian Finance Minister Alexei Kudrin told lawmakers in the upper house of parliament today.

A weaker ruble is ``unavoidable'' because an outlook of lower oil prices means the central bank will need to keep its reserves, Clemens Grafe, an emerging-market analyst at UBS AG wrote in a research note today.

Russia, the world's second largest oil producer, will have to widen its currency target ``fairly quickly'' by about 10-15 percent and raise the rates further ``in order not to lose a lot more reserves,'' according to the UBS note.

`Meaningless Devaluations'

The cost of protecting against a default by OAO Sberbank, Russia's largest lender, surged to 8 percent from 5.65 percent, while credit-default swaps on OAO Gazprom, the largest company, increased to 11.5 percent from 9 percent.

Credit-default swaps, conceived to protect bondholders against default, 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 deterioration in the perception of credit quality.

Sberbank bonds plunged, sending the yield on five-year notes due 2013 up 70 basis points to 15.29 percent, Bloomberg prices show.

``With yesterday's meaningless ruble devaluation, Bank Rossii has undermined the Russian authorities' recent efforts to prevent capital flight,'' Renaissance analysts said. ``This has led speculators to expect further, similar mini-devaluation steps.''

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