Russia Accelerates Defense of Ruble as Oil Declines, MDM Says

By Emma O’Brien

Jan. 13 (Bloomberg) -- Russia’s central bank sold about $7 billion to stem the ruble’s decline against the dollar and the euro yesterday, the most since it started devaluing the currency in November, according to Moscow’s MDM Bank.

Bank Rossii, which controls the ruble against a basket of dollars and euros to limit swings that hurt exporters, sold $6 billion and 700 million euros ($929 million) in the market yesterday, said Mikhail Galkin, head of MDM’s fixed-income research, citing the bank’s traders. It was the most sold since the central bank started letting the ruble fall on Nov. 11, he said.

Policy makers devalued the ruble twice in the past two days, in the first official trading this year, extending the currency’s slump to 18 percent against the basket since mid-November as the price of oil, Russia’s chief export earner, retreated. Citigroup Inc., Troika Dialog and Renaissance Capital expect the currency to drop at least 11 percent this quarter as Urals crude trades at $41.45 a barrel, below the $70 average needed to balance the 2009 budget.

“The oil price is edging lower and the speed of weakening is going up, so the trades against the ruble are becoming more profitable,” Galkin said.

The more than 70 percent drop in Urals crude from a July record has deepened concern that the country’s current account will slip into deficit. It was $90.8 billion in surplus in the first nine months of the year, the latest data available.

The currency has lost 13 percent against the dollar since Nov. 11 and fell to as low as 31.3725 today, the weakest since March 2003. Russia’s foreign-currency reserves have been reduced by 27 percent, or $160 billion, since August as Bank Rossii uses the funds to support the currency, according to central bank data as of Dec. 26. The ruble has fallen 17 percent versus the euro in the past two months. It rose 0.3 percent to 41.4513 per euro today.

‘Postponed Demand’

Pressure on the ruble was exacerbated yesterday by pent-up demand for foreign currency, said Evgeny Nadorshin, senior economist at Trust Investment Bank in Moscow. Companies and investors were unable to convert rubles from Jan. 1 to 10 because official trading on the Micex stock exchange was closed for the Russian Christmas holidays, he added.

“Everyone’s been expecting the ruble to depreciate so there was excessive currency built up at the end of last year that they needed to exchange once markets opened,” said Nadorshin, who also put yesterday’s currency sales at about $7 billion. “It was a case of postponed demand.”

Russia, which is aiming to free float the ruble by 2011, has managed the currency against the dollar-euro basket since 2005. After surging to a record 29.2843 against the mechanism on Aug. 4, the currency has been allowed to weaken 22 percent as the crisis in global credit markets and Russia’s war with neighboring Georgia deterred investors.

Seeking ‘Unpredictability’

Bank Rossii widened the range it allows the ruble to trade against the basket in the previous two days, an official unable to be identified on bank policy said. The currency can now fall about 17 percent from a target basket rate, from 2.6 percent on Nov. 10. The central bank has devalued the currency 14 times in the past two months.

The currency was little changed at 35.8082 against the basket by 11:19 a.m. in Moscow, after weakening 1.5 percent yesterday and 1.7 percent on Jan. 11. The basket is made up of about 55 percent dollars and the rest euros.

The central bank probably refrained from devaluation today to maintain a sense of “unpredictability” and wrong-foot speculators betting on the ruble’s decline, said Nadorshin. “They’ve always said this will not be a quick devaluation and that they’re committed to doing this step-by step.”

Non-deliverable forwards put the ruble 8.1 percent lower against the dollar at 33.98 in three months time. The decline expected over 12 months is 18 percent. 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.

Bank Rossii sold $3.4 billion on Jan. 11, according to MDM estimates.

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