Russia Won’t Need to Devalue Currency, Nomura Says

By Paul Abelsky

Sept. 10 (Bloomberg) -- Russia won’t need to resort to a second ruble devaluation in as many years as the beginnings of economic recovery in the world’s largest energy exporter support the currency’s trading band, according to Nomura Holdings Inc.

The ruble’s current level against the basket is “consistent with macroeconomic fundamentals,” said Ivan Tchakarov, a London-based economist for Nomura, Japan’s largest investment bank. “If we see disappointing data going forward, there could be a case of letting the ruble depreciate but definitely not beyond 41,” which is the weaker limit of the band.

The ruble has traded close to the lower limit of its band against a basket of euros and dollars since the beginning of this year, with the rate averaging almost 38. The ruble gained 0.7 percent against the dollar to 30.8370 at 12:17 p.m. in Moscow and strengthened 0.6 percent to 37.1630 against the basket.

Russia’s economic plight, culminating in a record 10.9 percent output slump last quarter, has led to devaluation calls from members of the business community, who favor a weaker ruble to support their exports. The country’s commodity-reliant export sector is struggling to recover from a slump in raw material prices as the global economy contracts this year.

‘Sharp, One-Time’

The Russian Association of Regional Banks, whose 450 members include the Russian units of Barclays Plc and Citigroup Inc., has called for a devaluation of as much as 30 percent, while billionaire Vladimir Potaninsaid this week that the “interests of the economy” will lead the currency to depreciate in the “mid term,” allowing exporters to cut costs and modernize production.

Moscow-based brokerage KIT Finance said in an Aug. 26 report that there’s a 60 percent chance of a “sharp, one- time” devaluation of between 20 percent and 25 percent in the next few months.

If higher commodities prices and budget spending don’t unlock lending and spur growth, “then only devaluation could give the authorities the additional freedom in fiscal policy and prevent prolonging economic recovery or even stagnation,” KIT analysts including Maria Kalvarskaia wrote in the report.

The central bank, Moscow-based Bank Rossii, is unlikely to give in to the calls, according to Tchakarov. After managing a 35 percent depreciation in the second half of last year, the bank in January expanded its trading range to a band of 26 to 41 against the dollar-euro basket.

‘Emotional Barrier’

“It is definitely an emotional barrier for the Russian central bank, so they would not like to breach it for fear of losing credibility,” he said. “They supported that level, they showed to the market that they are committed to that level.”

The central bank has “considerably” lessened the scope and frequency of its interventions after the ruble’s rate stabilized and inflation slowed, Chairman Sergey Ignatiev said yesterday. The regulator is “gradually” moving toward inflation targeting and allowing the ruble to float freely, he said. The bank has said it targets a free floating ruble by 2011.

Even so, Bank Rossii sold more dollars and euros than it bought in August for the second consecutive month. It sold a net $1.42 billion, including $1.16 billion and 177.8 million euros ($259 million), Bank Rossii said this week.

The central bank will allow for more volatility in the ruble’s rate and let the market decide the currency’s direction after foreign-currency risks in the economy eased compared with last fall, said Aleksandra Evtifyeva, a senior economist at VTB Capital in Moscow.

‘More Volatility’

“The regulator now can allow more volatility in the ruble and more weakness if oil prices unexpectedly decline as foreign exchange risks in the economy are way lower than in autumn last year,” she said. “Last year’s gradual depreciation and the fact that households or corporates did not lose any money in banks increased the credibility of the central bank and the banking system.”

The Economy Ministry yesterday raised its forecast for economic expansion in 2010 to 1.6 percent from 1 percent. The ministry predicts a GDP contraction of 8.5 percent in 2009.

Economy Minister Elvira Nabiullina said yesterday output may grow 3.9 percent to 4.5 percent in the second half of this year compared with the first six months.

Expansion

The Services industry expanded for the first time in 11 months in August, according to a purchasing managers’ index compiled by VTB Capital and published on Sept. 3. The manufacturing PMI reached an 11-month high, and signaled the industry is teetering on the brink of expansion.

The ruble came under pressure last year after the global economic crisis pushed down the price of oil, with Urals crude dropping to about $70 a barrel last month from a peak of $142.5 in July 2008. The government estimates that oil prices will average $58 a barrel next year, while the ruble will weaken and reach an average rate of 33.9 per dollar. The currency averaged 32.7051 against the dollar in the first eight months, according to Bloomberg.

Energy, including oil and natural gas, accounted for 69.1 percent of exports to countries outside the former Soviet Union and the Baltic states in the first seven months of the year, the Federal Customs Service said on Sept. 8.

President Dmitry Medvedev said yesterday it’s too early to halt economic stabilization measures, even though signs of recovery have begun to appear. Russia isn’t yet in a “stable, positive dynamic,” he said.

To contact the reporter on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net.