The ruble slid as much as 1.4 percent to 35.5900 per dollar, just 1.1 percent away from breaking through Russia’s 36 per dollar limit, before paring declines. Chairman Sergey Ignatiev said today Bank Rossii will intervene in the market, limit the amount of refinancing offered to banks and adjust interest rates to keep the ruble from breaking the new trading band.
“The market is testing whether the authorities see this band as something permanent or something that will move,” said Lars Rassmussen, an emerging markets analyst at Danske Bank A/S, which ranks itself among the five biggest traders of the ruble through Finnish subsidiary Sampo Bank Plc. “Our view is that they’ll move it because it’s not worth wasting the reserves for a band that is obviously not wide enough.”
Bank Rossii expanded its trading range for the ruble 20 times since mid-November before policy makers switched last week to let “market” forces help determine the exchange rate within a widened limit. The central bank drained more than a third of its foreign-currency reserves, the world’s third-largest, since August to stem the ruble’s 34 percent slide against the dollar.
Investors are betting against the ruble as a 69 percent slump in oil prices in the past six months weakens the economy, triggering Russia’s worst financial crisis since 1998. Some $290 billion left the country since August, according to BNP Paribas SA.
Putin Pledge
Prime Minister Vladimir Putin said in a Jan. 25 interview with Bloomberg Television that Russia had set itself apart from other countries by using reserves so as not to “crush the national currency overnight,” avoiding a repeat of the crisis a decade ago when the ruble plunged as much as 29 percent in a day.
The currency depreciated 21 percent against the dollar since the start of this year, the worst month since 1998. The government expects the ruble to decline to 36 per dollar, First Deputy Prime Minister Igor Shuvalov told the State Duma today.
Ignatiev said Jan. 22 the band would only be widened again should Urals crude prices slide to $30 a barrel and stay there for a long period of time. Urals added 0.8 percent to $43.72 today, still below the $70 average required to balance Russia’s current 2009 budget. Budget revenue may tumble by 4.4 trillion rubles ($124.6 billion) this year as the slump in oil prices reduces economic growth to zero, Finance Minister Alexei Kudrin said today.
Reinstating Curbs
The central bank reinstated curbs on speculators today, with a 5 billion-ruble restriction ($141 million) on so-called currency swaps, after imposing no limit yesterday. The agreements allow traders to bet on an exchange rate without having to sell currency upfront, and Bank Rossii has been limiting them since Oct. 20 to reduce speculative pressure on the ruble.
This means banks “don’t have the capacity to increase their ruble shorting,” said Alexei Moisseev, head of fixed-income research at Moscow investment bank Renaissance Capital. “It’s about trying to regulate speculators.”
Moisseev estimates the central bank will defend the ruble’s trading band for a month “for credibility” before widening the targets. Bank Rossii may seek to limit bets against the ruble by reducing the amount of money offered in unsecured loan auctions, which were introduced last year to help bolster liquidity in the banking sector.
The ruble is likely to fall below the central bank’s target level “in a couple of trading days,” according to Danske’s Rasmussen. Investors short a currency when they want to bet that it is going to depreciate.
Defending Target
Bank Rossii is defending the level of 41 rubles against its target basket of dollars and euros by offering foreign currency at 40.25 today, said Evgeny Nadorshin, senior economist at Trust Investment Bank, citing the firm’s traders.
The central bank sold $3.2 billion yesterday and $800 million on Jan. 28, according to MDM Bank estimates. It wasn’t present in the market from Jan. 23 to 27, the first three days after widening the exchange-rate band, according to Trust.
Russia manages its currency against a basket of 55 percent dollars and 45 percent euros to protect exporters.
The ruble was 1 percent weaker at 35.4500 per dollar by 2:49 p.m. in Moscow, after dropping to the lowest in at least 11 years. It fell 0.1 percent to 45.5235 per euro, near the lowest since the European currency’s introduction in 1999. Against the basket, the ruble depreciated 0.7 percent to 40.0505, after touching as low as 40.1971.
The new target will be “very quickly” breached without heavy intervention by the central bank to support the currency, according to Societe Generale SA.
Investors Bet
Investors are betting the ruble will breach the 36 per dollar target, with non-deliverable forwards putting it 8.1 percent weaker at 38.62 per dollar in three months time. In a year, NDFs show the currency 19 percent lower at 43.99. The agreements gauge expectations of a currency’s movements by fixing an exchange rate at a particular level in the future.
Bank Rossii will defend the new target because the government wants to prevent panic among a population that gauges the strength of the economy on the fate of the dollar-ruble rate, said Stanislav Ponomarenko, chief economist in Moscow at ING Groep NV. Though the ruble is the only legal tender, many mortgages, loans and rental payments are still denominated in dollars.
The ruble’s decline is “not rational” based on what is actually happening in the Russian economy, Arkady Dvorkovich, President Dmitry Medvedev’s economic adviser, said in an interview yesterday. “We do not believe that under the current conditions in the commodity markets and overall macroeconomic conditions that we will have to defend the ruble at 41,” he said.
Some Benefit
Oil and gas companies are the main beneficiaries of the ruble’s decline, said Douglas Polunin, who helps manage about $170 million in emerging markets assets, including Russian stocks, at Polunin Capital Partners in London.
Ruble devaluation reduces costs for companies with revenue in dollars and “is positive, as long as it doesn’t get out of hand,” said Polunin, who is buying energy stocks including OAO Lukoil, Russia’s largest independent oil producer, and OAO Surgutneftegaz, the country’s fourth-biggest.
A level of 35 per ruble is the “right base” for TNK-BP, the Russian oil venture of BP Plc, said billionaire Viktor Vekselberg, who also has a stake in the company. A “slightly” weaker ruble would give support to Russian business, he said in a Bloomberg Television interview from the World Economic Forum in Davos, Switzerland.
To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net
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