Ruble Falls Most in 10 Years This Week After Five Devaluations

By Emma O’Brien

Jan. 16 (Bloomberg) -- The ruble dropped, heading for the biggest weekly decline against the dollar in a decade, as Russia’s central bank quickened the pace of devaluations to stanch the erosion of currency reserves.

The ruble fell as low as 32.6675 per dollar today, the weakest since early 1998, before the government defaulted on $40 billion of debt. The ruble has fallen 5.5 percent in the six-day week since official trading began after Russia’s Christmas holidays, the biggest decline since March 1999.

Bank Rossii devalued the currency for the fifth time in six days, a central bank official said, more than double the pace in November and December. This week alone, the bank drained $25 billion from foreign-exchange reserves, according to estimates by Trust Investment Bank in Moscow. Prime Minister Vladimir Putin pledged last month to use the reserves, the world’s third- largest, to avoid “sharp” declines in the ruble.

“The moves now are faster, because the slower they move the easier it is for the market to position for further devaluation,” said Roderick Ngotho, an emerging-markets currency strategist in London at UBS AG, which forecasts a further 6.8 percent depreciation in the ruble versus the basket.

Foreign-currency reserves have shrunk 29 percent to $426.5 billion since August, the central bank said yesterday. The ruble has lost 28 percent against the dollar and 15 percent versus the euro in the period, while the currency has slipped 27 percent against the basket. The central bank allowed 17 depreciations in the past two months.

‘Salami-Slice’

“If the government had actually announced a one-off devaluation of around 30 percent in the autumn the issue would probably be done and dusted by now,” Chris Weafer, chief strategist in Moscow at UralSib Financial Corp., wrote in an e- mail to clients today. “Instead, the salami-slice approach that the central bank is using has created considerable uncertainty and the expectation of further weakness.”

Investors withdrew about $245 billion from Russia in the last four months of 2008, according to BNP Paribas SA, amid the country’s worst financial crisis since the 1998 economic collapse, plunging commodity prices and an internationally condemned conflict with neighboring Georgia.

The currency lost 1.2 percent to 37.3326 against the basket, by 1:07 p.m. in Moscow, and weakened 7.5 percent this week. The ruble weakened 1.5 percent to 43.0959 per euro today, adding to this week’s 9.6 percent drop, also the biggest weekly decline since March 1999. It last traded at 0.6 percent to 32.5689 per dollar.

Possible Recession

The ruble slumped more than 10 percent against the dollar in the last week of March 1999, when North Atlantic Treaty Organization jets started bombing Yugoslavia as the Balkan war raised tensions between Russia and the West.

Russia’s $1.7 trillion economy may slide into recession in the first half as Urals crude, the country’s main oil export blend, continues its 68 percent slump from a record-high in July, Arkady Dvorkovich, President Dmitry Medvedev’s economic adviser, said in December.

Urals currently trades at $44.67 a barrel, below the $70 average price required to balance Russia’s budget this year. The government cut its average oil forecast for 2009 by 20 percent to $40 a barrel, Vedomosti reported yesterday. Industrial output sank the most in 10 years in November and unemployment rose to 6.6 percent.

“The reasonably rapid pace is better than trying to hold the ruble at an unsustainable level,” said Paul McNamara, who helps manage about $1 billion in emerging market assets at Augustus Asset Managers Ltd. in London, which recently pared its bets against the ruble. “Obviously the best solution would have been one big devaluation but it has already come quite far.”

Speculators’ Bets

The ruble will slide 10 percent against the dollar to 36.36 in three months time, according to non-deliverable forwards. Twelve-month NDFs, which fix a currency at a particular level at a future date, put the decline at 21 percent. The contracts are often used by companies to protect against foreign-exchange fluctuations.

Both Citigroup Inc. and UBS forecast the ruble will slide to about 40 against the basket this quarter, while Renaissance Capital, a Moscow-based investment bank, predicts a further 12 percent depreciation in the dollar-ruble rate. Goldman Sachs Group Inc. says the currency may drop another 11 percent in the next six months.

The need for Russian companies to refinance debt is one of the main pressures pushing the ruble down, McNamara said. The dispute over gas shipments through Ukraine to Europe isn’t helping the investment case, he said.

Gas Shipments

Russian companies need to repay more than $80 billion of debt in foreign this year, according to Societe Generale SA. Debt refinancing is one of the main pressures pushing the ruble down, McNamara said.

Gas flows have been shut off since Jan. 7 amid disagreements over pricing and allegations Ukraine was siphoning gas. The former Soviet republic rejected OAO Gazprom’s request to resume transit gas today, RIA Novosti reported, citing Valentyn Zemlyanskyi, spokesman of state energy company NAK Naftogaz Ukrainy.

Putin meets his Ukrainian counterpart, Yulia Timoshenko, in Moscow tomorrow to try and break the impasse.

Morgan Stanley cut its rating on Russian stocks to “equal- weight” from “overweight” as “political tensions” and the slump in commodity prices worsened prospects for the economy, according to the research report issued today.

The Micex index gained 1.5 percent to 614.80 today, trimming this week’s drop to 0.7 percent. Government 30-year dollar bonds rose for the first day this week, pushing the yield 16 basis points lower to 9.79 percent.

Bank Rossii has raised interest rates twice since starting the current round of devaluations on Nov. 11, in a bid to arrest outflows, which reached a record $129.9 billion last year. The central bank has limited so-called currency swaps, agreements that allow traders to bet on the exchange rate without having to sell the currency upfront, to 5 billion rubles ($153 million) since Dec. 3.

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