Russia Weakens Ruble Defense After Record Drop in Crude to $39

By Emma O’Brien

Dec. 5 (Bloomberg) -- Russia weakened its defense of the ruble for a fourth time in a month, pushing the currency near a three-year low against the dollar, as the price of the nation’s crude oil fell by a record this week to less than $40 a barrel.

The currency slid as much as 1.4 percent to 28.1768 per dollar and dropped 1 percent to 31.5777 against the central bank’s target basket of euros and dollars. “The corridor has been widened,” a Bank Rossii official who declined to be identified said in a phone interview from Moscow today.

“The gradual approach feeds expectations of further devaluation,” said Tatiana Orlova, an economist in Moscow for ING Groep NV, which forecasts a 20 percent drop by the end of next year. The depreciations are prompting people and companies “convert all extra rubles into foreign exchange,” she said.

Russia, the world’s largest energy producer, raised interest rates twice last month and drained $143 billion from its foreign-currency reserves to arrest a 17 percent drop in the ruble since August as oil plunged. Urals crude, Russia’s main export blend, slumped 20 percent this week to $39.82 a barrel, below the $70 average needed to balance Russia’s 2009 budget.

“Given oil is already below $40 a barrel we can’t rule out more depreciation,” said Evgeny Gavrilenkov, chief economist at Troika Dialog in Moscow, Russia’s oldest investment bank. “Any further devaluation depends on oil.”

Russia is facing its worst financial crisis since the government defaulted on $40 billion of debt a decade ago, prompting a 71 percent ruble devaluation against the dollar that eroded bank deposits.

Concern about the currency’s decline spurred Russians in October to withdraw 355 billion rubles ($13 billion) from their deposits, the most in two years, according to central bank data. Foreign-currency deposits rose 11 percent.

Putin’s Pledge

Bank Rossii has expanded the trading band against the basket by 1 percent either side four times since Nov. 11, allowing a 3.9 percent depreciation against the mechanism in that period. The basket is made up of 55 percent dollars and the rest euros, and is intended to mitigate the effect of currency swings on Russian exporters.

Prime Minister Vladimir Putin said yesterday that Russia will avoid “sharp” swings in the ruble by using its $454.9 billion of reserves to support the currency. The nation’s cash pool rose last week for the first time in two months, the central bank said yesterday.

“We will see more gradual devaluations of around 1 percent at a time,” said Elisabeth Andreew, chief currency strategist at Nordea AB in Copenhagen, Scandinavia’s biggest bank. “We could see the ruble 15 percent weaker against the basket in six months and 20 percent weaker in 12 months.”

‘Perfect Storm’

Goldman Sachs Group Inc. economist Rory MacFarquhar in Moscow predicted this week a 25 percent decline against the basket next year as the central bank seeks to preserve its cash reserves as oil prices continue to fall.

Any further slide in Urals prices toward a $30-a-barrel average next year may trigger a depreciation of as much as 35 percent versus the basket, said Troika’s Gavrilenkov. Merrill Lynch & Co. chief investment officer Gary Dugan forecast last week that Russia may be headed for a recession should oil average $30 next year.

“Russia is now facing a perfect storm of falling commodity prices, weaker external demand, tighter credit conditions and slower real incomes growth for which no amount of currency adjustment can compensate,” Neil Shearing, an emerging-markets economist at Capital Economics Ltd. in London, said in a research note today.

Curbing Speculators

Bank Rossii sold $2 billion to support the ruble yesterday, taking sales this week to as much as $11.5 billion, according to estimates by Moscow-based MDM Bank. That compares with about $4.4 billion sold last week and $7 billion the week before, MDM said.

As well as selling dollars and raising interest rates, Bank Rossii has been limiting the amount of currency swaps, agreements allow traders use to bet on the exchange rate without having to sell currency upfront. The limit was set at 5 billion rubles ($178 million) for the past three days. The bank also warned banks not to increase bets on foreign currencies.

“They’re getting closer and closer to what they think is a fair level for the ruble,” said Matthew Vogel, head of emerging-markets research in London for Barclays Capital Group. “It shows they’re committed to allowing an orderly decline in the ruble.”

Default Swaps

OAO Lukoil, Russia’s biggest independent oil producer, and OAO Rosneft, the largest oil company, led a 1.9 percent slump in the Micex index of 30 stocks today. Lukoil dropped 3.4 percent to 800 rubles, and Rosneft declined 2 percent to 94.30 rubles.

The currency traded as low as 35.9480 per euro today, the lowest since Oct. 2, and was at its weakest against the dollar since February 2006.

Russia’s benchmark 30-year government bond slid for a fifth straight day, pushing the yield 3 basis points higher to 11.27 percent.

The cost of protecting Russian debt from default jumped 6 basis points to 776 points today. Credit-default swaps protect bondholders against default by paying the buyer face value in exchange for the underlying securities or cash equivalent should the borrower fail to adhere to debt agreements.

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