By Emma O’Brien
Dec. 11 (Bloomberg) -- Russia devalued the ruble for the fifth time in a month, widening its trading band against the dollar and euro after reserves fell $161 billion as the central bank tried to defend the exchange rate.
Bank Rossii extended the amount the ruble can decline against a target exchange rate to 7.7 percent, from 6.7 percent yesterday and 3.7 percent a month ago. The band was widened on both sides by 30 kopeks today, said a spokesman who declined to be identified on bank policy. The currency weakened 0.7 percent against the basket used to manage its fluctuations.
“They don’t have a choice but to let it weaken and the faster they do it the better,” said Beat Siegenthaler, head of emerging markets strategy in London at TD Securities Ltd. “Regular weekly steps are now the most likely scenario.”
Russia has drained 27 percent of its reserves since the start of August to stymie a 16 percent decline in the ruble versus the dollar as tumbling oil prices, the war in Georgia and the worst global financial crisis since the Great Depression caused investors and locals to remove about $211 billion from the country, BNP Paribas SA data shows.
The world’s biggest energy producer is suffering as the price of Urals crude, its main export blend, has dropped 71 percent from a July record to $40.32 a barrel, below the $70 average required to balance the nation’s 2009 budget.
The ruble fell 4.7 percent against the central bank’s dollar-euro basket in the past month. Goldman Sachs Group Inc. predicts the sliding price of oil will force a ruble drop of as much as 25 percent over the next 12 months. Troika Dialog, Russia’s oldest investment bank, is calling for a one-time, 20 percent devaluation in late January, when there is less risk of bank runs during the New Year’s holidays. UniCredit SpA forecasts a 15 percent decline by end-2009.
Bank Withdrawals
Russians withdrew 6 percent from their savings accounts in October, the most since Bank Rossii started collecting the data two years ago. Deposits in foreign currency, meanwhile, rose 11 percent as the currency’s decline sparked concern. Russians lost life savings in 1998 after the ruble plunged 71 percent versus the dollar and the government defaulted on $40 billion of debt.
The central bank’s foreign-exchange reserves decreased by $17.9 billion to $437 billion in the week to Dec. 5, more than the $11.25 billion decline that was the median estimate of five economists surveyed by Bloomberg. Prime Minister Vladimir Putin pledged last week to use the nation’s reserves stockpile, the world’s third largest, to prevent “sharp” movements in the currency.
The ruble dropped as much as 1.4 percent to 36.7130 per euro, the weakest since Sept. 25. It was at 36.7066 per euro by 1:56 p.m. in Moscow, from 36.6603 yesterday. Against the dollar, the currency fell as much as 0.5 percent to 27.9647.
More Devaluations
Those movements left the ruble at 31.8370 versus the basket, which is made up of about 55 percent dollars and the rest euros, and is used to protect exporters from currency swings.
The weakest end of the trading band is now about 31.90, from the previous 31.60, said Siegenthaler, who predicts a further 20 percent drop versus the basket should oil prices stay at current levels.
“It seems that they will continue at this pace of small devaluations,” said Elisabeth Andreew, chief currency strategist at Nordea AB in Copenhagen, Scandinavia’s biggest bank. “But we can’t rule out a bigger devaluation.”
The ruble may drop 19 percent to 34.51 per dollar, according to 12-month non-deliverable forward contracts, used by traders to speculate on the currency. NDFs are contracts used to fix a currency at a particular level at a future date and are used by companies seeking to protect against foreign-exchange fluctuations.
‘One-Way Bet’
“I don’t see how they can possibly do this without a one- off devaluation because at the moment it is just a one-way bet for fund managers,” said Paul McNamara, a London-based fund manager at Augustus Asset Management Ltd., which oversees about $1.2 billion of emerging markets assets. “No one will put any money into Russia unless they do this.”
Augustus sold Russian bonds before the country’s five-day war with Georgia in August and won’t resume investing in the country until the currency is weakened to a “sustainable” level, McNamara said.
The devaluation has to be big enough to inject “two-way risk back into the ruble-dollar rate,” he said. “If they devalue 15 percent and still have $400 billion of reserves they’ll be in a much better position than if the do this gradually and end up with $200 billion.”
Wasting Reserves
The central bank will probably widen the band another three times this month by steps of 1 percent, Elina Ribakova, Moscow- based chief economist for Citigroup Inc., wrote in a research note today. The brokerage forecasts the ruble will decline as much as 20 percent versus the basket.
Russia is wasting its reserves supporting the ruble as the oil price drops, Win Thin, a senior currency strategist in New York at Brown Brothers Harriman & Co. said Dec. 4. Central bank intervention have just prevented the ruble from the fate of other currencies of commodity-exporting nations, such as Mexico, where the peso has dropped 26 percent versus the dollar since August, he said.
A gradual weakening of the ruble “is not a catastrophic idea because any kind of sharp move would surely create more panic,” said Tatiana Orlova, an economist in Moscow at ING Groep NV, who forecasts the ruble will be 15 percent weaker against the basket by the end of the first quarter on 2009.
To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net
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