Ruble Falls to Record Against Euro; Russia Devalues for 2nd Day

By Emma O’Brien

Dec. 18 (Bloomberg) -- The ruble fell to a record against the euro as Russia devalued the currency for a second time this week amid tumbling oil prices and shrinking reserves.

The ruble weakened to an all-time low of 40.1096 per euro, and was 0.8 percent lower as of 2:39 p.m. in Moscow. Bank Rossii allowed the ruble to decline as much as 1.4 percent against its target basket of dollars and euros, the eighth depreciation since Nov. 11, according to a bank official who declined to be identified. The currency fell 15 percent versus the dollar since August.

An internationally condemned war with Georgia, a 66 percent plunge in oil prices and the worst global financial crisis since the Great Depression have caused investors to withdraw $211 billion from Russia since August, according to BNP Paribas SA. Bank Rossii drained $162.7 billion, or 27 percent, from its foreign-currency reserves, the world’s third-largest, to prevent a sudden devaluation causing a repeat of the bank runs of 1998, when the ruble tumbled 71 percent against the dollar.

“It’s better that they do this quicker rather than slower because everything is looking particularly weak in Russia with the oil price where it is,” said Eugene Belin, head of fixed income, currencies and commodities in Moscow at Citigroup Inc. “The sooner they’re finished with this devaluation process the better for the economy.”

The ruble was little changed at 27.2087 per dollar today. It weakened 0.4 percent to 33.8393 against the basket, which is made up of about 55 percent dollars and the rest euros and is used to protect Russian exporters from fluctuations in the ruble.

Faltering Economy

The currency plunged as much as 4.2 percent in two days, the biggest drop in a decade against the euro. It is about 10.6 percent below the central bank’s target exchange rate, compared with 9.3 percent yesterday and 3.7 percent on Nov. 11. The weakest end of the corridor that Bank Rossii is defending is “not clear yet,” said Mikhail Galkin, head of fixed-income and credit research in Moscow at MDM Bank.

Barclays Capital says Russia’s economy will sink into a recession next year as the price of Urals crude, the country’s export oil blend, traded at $41.38 a barrel today, below the $70 a barrel average needed to balance the budget in 2009. Industrial production shrank the most last month since the economic collapse 10 years ago. Standard & Poor’s cut Russia’s credit rating last week for the first time in nine years on concern the country is wasting reserves defending the currency.

‘Faustian Bargain’

Russia’s currency reserves fell $1.6 billion to $435.4 billion in the week to Dec. 12, compared with a drop of $17.9 billion the previous week, the central bank said today. That was less than the $4 billion decline expected by economists surveyed by Bloomberg. The stockpile reached a record $598.1 billion in the first week of August.

“The slower they move on the ruble the more it’s going to cost them as everyone gets ahead of the curve,” said James Fenkner, who manages about $100 million of Russian assets at Red Star Asset Management LP in Moscow. “But politically a big, big drop could cost the Kremlin support. They have a Faustian bargain where everyone puts up with them as long as things are going OK.”

Prime Minister Vladimir Putin has pledged to use the reserves to prevent a “sharp” devaluation of the currency. The ruble may drop a further 14 percent to as low as 31.8 per dollar in 2009, should the U.S. currency trade around 1.3 per euro, Economy Minister Elvira Nabiullina said yesterday, according to Interfax. The dollar fell 1.1 percent to 1.46 per euro today.

Dollar Weakness

Banks including Goldman Sachs Group Inc. and Citigroup Inc. are forecasting the ruble will lose as much as 25 percent over the next year as sliding oil erodes Russia’s $91.2 billion current-account surplus. Troika Dialog, the nation’s oldest investment bank, is calling for a one-time depreciation of as much as 20 percent versus the basket in late January after the holiday period. Commerzbank AG expects the currency to be gradually devalued to 35 versus the basket.

Urals slid 0.4 percent today amid concern the Organization of Petroleum Exporting Countries’ record production cut yesterday won’t be enough to boost prices that have slumped 71 percent from a July record.

The sliding dollar and weakness of oil prices spurred Bank Rossii to speed up the devaluation, and policy makers may allow another decline tomorrow, said Elisabeth Gruie, an emerging- markets currency strategist in London at BNP Paribas.

Stocks Fall

“With oil prices hovering around $40, there’s motivation for the central bank to continue adjusting the currency,” said Gruie, who expects a further 5 percent depreciation against the basket. “Because locals are mostly fixated on the dollar-ruble rate they’re taking advantage of the weaker generic dollar. It’s a smooth devaluation.”

Russia’s Micex stock index fell 3.9 percent to 617.43, declining for a second day. The nation’s 30-year 7.5 percent dollar-bonds rose for the second day this week, pushing the yield 12 basis points lower to 10.63 percent. The 8.25 percent notes maturing 2010 rose, as the yield slid three basis points to 3.67 percent. Bond yields move inversely to prices.

Russian property stocks slid in Moscow trading after UniCredit SpA said real-estate prices are so inflated they may need to be halved to lure buyers back to the housing market. OAO Sistema Hals, the developer controlled by Russian billionaire Vladimir Yevtushenkov, slid as much as 11 percent to 319 rubles, as UniCredit called Moscow’s property market “overheated.”

After averaging 7 percent growth in the eight years to 2007, Russia’s economy may shrink as the reduction in oil revenues erodes the country’s $91.2 billion current-account surplus. Russians withdrew 354.5 billion rubles ($13 billion) from savings deposits in October, four times the amount in September and the biggest drop since Bank Rossii started collating the data. The nation is aiming to free float the ruble by 2011.

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