Russia Scales Back Ruble Defense as Oil Drop Spurs Depreciation

By Emma O'Brien

Nov. 24 (Bloomberg) -- Russia's central bank retreated in its defense of the ruble, allowing it to depreciate after draining nearly a quarter of the nation's foreign reserves in less than four months in an effort to stem the currency's decline.

The ruble fell as much as 0.8 percent against the dollar and 1.3 percent versus the euro as crude oil, Russia's main export, traded around $45 a barrel, 68 percent below a July record. Bank Rossii widened the band against which it manages the ruble by 30 kopeks (1 U.S. cent), or 1 percent, at each end, according to two bank officials who declined to be identified.

``The central bank is tweaking the pressure cooker to let a little steam out,'' said Chris Weafer, chief strategist in Moscow at UralSib Financial Corp.

Russia's international reserves, the world's largest after China's and Japan's, fell by $144.6 billion since the beginning of August as the central bank struggled to contain its worst financial crisis since 1998. The ruble slumped 15 percent against the dollar since July 31 and 5.5 percent versus the basket.

The currency fell to 27.5548 per dollar as of 3:54 p.m. in Moscow, from 27.5090 last week. Against the euro, it weakened to 35.1014, from 34.6270.

The declines left the ruble 0.7 percent weaker at 30.9350 against the central bank's dollar-euro basket, falling through the 30.70 level considered the weak end of the range. The basket, which consists of about 55 percent dollars and the rest euros, is used by policy makers to limit the effect of currency swings on Russian exporters.

`Ruble Weaker'

The ruble will weaken 13 percent by the end of 2009 as declining oil prices erode Russia's $91.2 billion current-account surplus, according to the median estimate of 16 economists surveyed by Bloomberg last week. Urals crude, Russia's main export blend, fell 1.7 percent to $44.63 a barrel today, below the $70 average that Finance Minister Alexei Kudrin says is needed to balance the budget next year.

``They're not sure about the oil forecasts and so they prefer to see the ruble weaker in the current circumstances,'' said Evgeniy Nadorshin, a senior economist in Moscow at Trust Investment Bank.

Bank Rossii expanded the trading band on Nov. 11, also by 30 kopeks. The weakest end of the band is now 31 versus the basket, according to Martin Blum, head of emerging-markets economics and currency strategy in Vienna at UniCredit SpA.

`Substantial Widening'

Investors withdrew more than $180 billion from Russia since the start of August, BNP Paribas SA said, as the country fought an internationally condemned war with neighboring Georgia and the seizure in credit markets intensified. The dollar-denominated RTS Index is headed for its worst year since 1998 and the 30-year government bond yield more than doubled.

The ruble may have a ``certain tendency toward weakening,'' Bank Rossii Chairman Sergey Ignatiev said Nov. 10 in Moscow. Prime Minister Vladimir Putin told members of his United Russia Party last week there won't be any ``sharp changes'' in the ruble rate.

``The government is still hoping for a rise in the price of oil,'' said UralSib's Weafer. ``If that doesn't happen then we should expect a more substantial widening of the basket in two or three weeks.''

A decline in reserves to below $400 billion may be a trigger, he added. The ruble may be allowed to depreciate about 1 percent every two weeks, ``more smoothly and rapidly than we expected,'' Rory MacFarquhar, an economist in Moscow at Goldman Sachs Group Inc., wrote in a client report today. Goldman predicts the currency may be 18 percent weaker by August.

Slowing Growth

About 80 percent of the ``pressure'' on the ruble now is coming from Russian citizens converting their rubles into foreign currency, according to Basil Issa, an emerging-markets analyst in London at BNP. When Russia defaulted on $40 billion of debt in 1998, it was forced to devalue the ruble, which slumped as much as 71 percent against the dollar that year. Russia's reserves were $18.4 billion prior to the default.

Russia's economic growth may slow to 2 percent next year, Arkady Dvorkovich, President Dmitry Medvedev's economics adviser, said last week. The Economy Ministry predicts growth of 7.3 percent in 2008 and the rate has averaged 7 percent over the past nine years.

The Micex Index of 30 stocks climbed 9.6 percent today, its first advance in four days, led by utility shares such as OAO RusHydro. The government may allow RusHydro to raise electricity prices more than any other power generator because of its investment program, Vedomosti reported today.

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