Russia Quickens Ruble Defense as Oil Drops, 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 ruble 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.

Investors and citizens have taken more than $200 billion out of Russia since the start of August, according to BNP Paribas SA, deterred by the nation’s worst financial crisis since it defaulted on $40 billion of debt in 1998.

Pent-Up Demand

The currency has lost 13 percent against the dollar since the central bank began devaluing the currency in mid-November, 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 41.4699 per euro today.

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.

Investors Deterred

“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.

Prime Minister Vladimir Putin pledged to avoid a “sharp” decline in the currency last month and both he and President Dmitry Medvedev have urged citizens to keep their savings in local currency. Continually declining oil prices will ensure “more depreciation of the ruble is required,” Arkady Dvorkovich, Medvedev’s economic adviser, said in an interview Dec. 19.

Russian Gas

Russians withdrew 6 percent of ruble-denominated deposits in October, the most since Bank Rossii started collating the data two years ago. Deposits held in dollars had an average return of 12 percent in 2008, while the profitability on ruble accounts fell 5.2 percent, Moscow-based auditing and consulting company BDO Unicon said in an e-mailed report yesterday.

Russia resumed pumping gas into pipes through Ukraine today, after a six-day supply halt that disrupted flows to at least 20 European nations. OAO Gazprom, the Russian natural-gas exporter that provides a quarter of Europe’s gas, suspended shipments through Ukraine Jan. 7 amid disputes over pricing and allegations the former Soviet republic was siphoning gas.

The resolution “should improve market sentiment somewhat and relieve some pressure on the ruble,” BNP Paribas emerging- market currency analysts Shahin Vallee and Elisabeth Gruie wrote in a note to clients today. BNP advises placing so-called short positions on the ruble against the basket. A short is a bet that an asset or security it is going to decline.

Blocking Supplies

Ukraine’s currency, the hryvnia, was little changed at 8.80 per dollar today, according to traders at Galt & Taggart Holdings Ltd. in Kiev. Less than four hours after the resumption of supplies, Gazprom Deputy Chief Executive Officer Alexander Medvedev said Ukraine is blocking supplies and that it may declare force majeure.

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 Russian currency was little changed at 35.8064 against the basket by 1:55 p.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.

Step-By-Step Devaluation

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 8.2 percent lower against the dollar at 33.98 in three months time. The decline expected over 12 months is 19 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. Trust Investment puts the amount sold in December at about $75 billion, with $20 billion alone between Dec. 26 to 30, Nadorshin said.

The depletion of Russia’s reserves, the world’s third largest, prompted Standard & Poor’s to lower the credit rating of Russian debt last month. Dvorkovich said last month a recession may be possible in Russia this year, after industrial output sank the most for 10 years in November and unemployment rose to 6.6 percent.

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