Russia May ‘Dirty Float’ Ruble as Central Bank Weakens Defense

By Emma O’Brien

Jan. 21 (Bloomberg) -- Russia may abandon the ruble’s dollar-euro trading band to protect foreign-currency holdings after draining almost 30 percent of its reserves since August, according to MDM Bank and BNP Paribas SA.

The central bank, which has controlled the ruble against a target exchange rate based on a basket dollars and euros since 2005 to protect exporters from currency swings, may move away from daily management of the ruble, said Nikolai Kashcheev, head of economic research at Moscow-based MDM. Instead the currency would trade freely, with the central bank intervening as necessary to avert any significant economic shock through a so- called “dirty float” mechanism, he said.

“A dirty float would look like it was free market but the central bank would still have a measure of control,” said Kashcheev, who forecast the ruble may fall 5.9 percent against the dollar if the central bank moved to a dirty float this week. “It would be a preferable outcome to the devaluation because what they’re doing at the moment is costing too much in reserves.”

The ruble lost 29 percent against the dollar since August as plunging oil prices and the war in Georgia exacerbated the country’s worst financial crisis since 1998, when the currency dropped 71 percent. Prime Minister Vladimir Putin pledged last month to use the nation’s foreign-exchange reserves, the third largest worldwide, to avoid “sharp” currency swings.

The central bank sold a record $11 billion on Jan. 19, as the ruble weakened against the dollar, according to Moscow’s Trust Investment Bank.

Widening Band

Bank Rossii today widened the range the ruble can move within a dollar-euro target basket for the 19th time since Nov. 11. The currency is now allowed to weaken about 24 percent against the target, compared with 3.6 percent on Nov. 11, according to Stanislav Ponomarenko, chief economist in Moscow at ING Groep NV.

The ruble was little changed at 32.9673 per dollar by 3:52 p.m. in Moscow today, after weakening 11 percent this year. It was little changed at 42.5978 per euro, having gained 0.1 percent in 2009 trading. The ruble basket comprises of about 55 percent dollars and the rest euros. The currency was percent stronger at 37.2931 against the basket.

The ruble didn’t slump today to around 39, the weakest end of the basket trading band, because banks and companies sought to convert foreign currency built up over the past 2 1/2 months to pay corporate taxes and minerals extraction fees due in the next week, said Stanislav Ponomarenko, chief economist in Moscow for ING Groep NV. “There is a ruble liquidity squeeze,” he said.

Buying Dollars

Bank Rossii bought dollars yesterday and today from lenders and companies because it doesn’t want the ruble to strengthen too far, said Alexei Moisseev, head of fixed-income research at Moscow investment bank Renaissance Capital.

Investors withdrew $245 billion from Russia since August, according to BNP Paribas, as the price of Urals crude oil, the nation’s main export earner, declined 66 percent to $41.65 a barrel, below the $70 a barrel needed to balance the budget this year.

Bank Rossii allowed the ruble to weaken an average 2 percent a day on the eight trading days it devalued the ruble this year. That’s an acceleration from depreciations of about 1 percent in November and December when the trading band was widened twice a week on average.

The step-by-step devaluation is too predictable, encouraging investors to bet on further depreciations, increasing the cost for the central bank to stem declines, said Shahin Vallee, an emerging markets currency strategist in London for BNP Paribas SA, France’s largest bank.

‘Line in the Sand’

It “sets a line in the sand against the basket that speculators know they will get dollars at,” Vallee said. “The basket setup also means they have to always sell euros when they’re selling dollars to balance it out.”

Bank Rossii may allow the ruble to strengthen “temporarily” to deter speculators from placing so-called short positions on the ruble, Elina Ribakova, Citigroup Inc.’s chief economist in Moscow, wrote in a research note yesterday. Citigroup forecasts a further 13 percent depreciation in the ruble against the dollar-euro basket this quarter, she said. A short is a wager a currency will decline.

The currency may slide to around 35 per dollar if a dirty float was introduced this week, said Kascheev at MDM. Bank Rossii would withdraw from daily intervention in the market and would probably make an announcement should policy makers move to a dirty float, Kashcheev said.

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