By Emma O’Brien
Jan. 12 (Bloomberg) -- Russia’s ruble slid to the weakest level in almost six years against the dollar after the central bank devalued the currency for a second day as declining oil prices threaten to deepen the country’s economic crisis.
The ruble fell 1.7 percent to 31.0533 per dollar by 2:03 p.m. in Moscow, from 30.5312 yesterday, extending its decline to 24 percent since August. The range the ruble is allowed to trade against a basket of dollars and euros was widened, a central bank official who declined to be identified on bank policy said by telephone today. Official ruble trading began yesterday for the first time this year.
“After the long holiday the central bank’s come back intent on showing they’re still on a devaluation path,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt, which rates itself one of the top 10 traders of the ruble in the world. “With the oil price shock there is an increased burden on Russia’s current account and that necessitates a rebalancing of the currency.”
Bank Rossii devalued the currency for the 14th time since Nov. 11 as Urals crude, Russia’s main export blend, slid to $42.99 a barrel, below the $70 average required to balance this year’s budget, and the halt in gas supplies to Europe damped the outlook for export earnings. The ruble may retreat 10 percent against the basket this month as companies buy foreign currency to repay more than $80 billion of debt this year, according to Societe Generale SA, France’s second-largest bank.
The currency weakened 1.5 percent to 35.8185 versus the central bank’s target basket, which is made up of about 55 percent dollars and the rest euros. Policy makers devalued the ruble against the basket by 1.5 percent yesterday.
Draining Reserves
Russia, the world’s largest energy exporter, has drained $160 billion, or 27 percent, of its foreign-currency reserves since the start of August as the central bank sought to mitigate the currency’s slide. Investors have withdrawn more than $200 billion from Russia since then, according to BNP Paribas SA, amid the global credit-market crisis and Russia’s war with neighboring Georgia. Urals slumped 54 percent last year, a record drop.
The dispute between Russia and Ukraine over natural gas, which resulted in at least 20 European countries experiencing supply disruptions, is further deterring investors, said Kieran Curtis, a fund manager in London at Aviva Investors Ltd., which holds Russian 30-year government bonds among its $787 million in emerging market holdings.
Russia halted transit shipments through Ukraine on Jan. 7 after accusing Ukraine of siphoning gas amid a dispute over pricing. Ukraine today signed a deal on monitoring gas flows from Russia, an agreement which will pave the way for the resumption of gas shipments, OAO Gazprom, Russia’s gas exporter, said.
Looking Elsewhere
“The long-term story for investors is negative on Russia,” he said. “Stopping the flow is going to make all of their customers look elsewhere for at least part of their gas.”
Ukraine’s hryvnia declined against the dollar, according to UniCredit SpA currency traders in Vienna.
Russia is experiencing its worst economic crisis since defaulting on $40 billion of debt in 1998, after credit markets froze and the U.S. and Europe slide into recession. Standard & Poor’s cut the country’s credit rating last month amid concern about the depletion of reserves and the government has pledged a more than $200 billion rescue package.
Industrial output sank the most in 10 years in November and unemployment rose to 6.6 percent. An index of Russian service industries plummeted to a record low last month as consumers curbed spending, VTB Bank Europe said on Jan. 6.
Bonds, Swaps
The government’s 30-year 7.5 percent dollar bonds declined, pushing the yield 10 basis points higher to 9.19 percent.
The cost of protecting Russian government debt from default rose 10 basis points to 660 points today, according to CMA Datavision in London. 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. The contracts traded at a record 1,233 on Oct. 24.
A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. An increase indicates deterioration in the perception of credit quality; a decline signals the opposite.
The ruble traded at 41.6245 per euro, according to Bloomberg data, down 1.2 percent from 41.1317 yesterday, based on figures from the Micex stock exchange. The currency fell to as low as 31.1385 per dollar today, the weakest since April 2003, according to Bloomberg data.
More Losses
Russia’s currency may lose 11 percent against the basket in the first quarter, according to Citigroup Inc. Danske Bank A/S in Copenhagen sees a 15 percent drop in the ruble by year end, and Commerzbank forecasts a 6 percent decline, Leuchtmann said.
Non-deliverable forwards put the ruble 7.4 percent lower against the dollar at 33.55 in three months time. NDFs are contracts used to fix a currency at a particular level at a future date and companies use them to protect against foreign- exchange fluctuations.
“I’d be surprised if another 20 percent didn’t bring the ruble to where it needs to be,” said Curtis at Aviva Investors.
The declining oil price looks set to continue the current pace of devaluation, Arkady Dvorkovich, economic adviser to President Dmitry Medvedev, said in a Dec. 19 interview. Prime Minister Vladimir Putin has pledged to support the ruble to avoid sudden swings.
“One percent steps are not ideal because the central bank still needs to spend a lot of money to keep the ruble where it is now,” said Beat Siegenthaler, head of emerging markets strategy in London at TD Securities Ltd., which predicts the ruble will be allowed to fall as much as 15 percent in the first quarter. “A lot of people in the market would hope for a sharper devaluation but it seems the central bank is not willing to do that.”
Bank Rossii sold $3.4 billion yesterday to prevent the ruble weakening further, according to estimates by Moscow’s MDM Bank.
To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net
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