Central Bank Drops $4Bln to Prop Ruble

The Central Bank stepped into the market and sold up to $4 billion on Thursday to brake the ruble's fall, while shares went into free-fall despite a much-awaited shareholder peace deal on oil company TNK-BP.

The ruble fell as low as 30.41, its lowest since the current composition of the basket was set at 55 cents and 45 euro cents in February 2007.

The benchmark RTS Index closed 3.94 percent lower, at 1,526.57, less than a point above the intraday low that marked the index's weakest level this year. The RTS has not seen levels this low since October 2006.

Falling Western markets and fears that capital outflows could accelerate outweighed a long-awaited end to a conflict between BP and its local partners, which had played out in the international media and poisoned sentiment.

"It is easier to undermine investor trust than it is to revive it," said Alexander Orlov, head of research at Da Vinci Capital Management.

The ruble's move took its combined losses for the last two days to around 60 kopeks, or 2 percent.

That appeared to galvanize the Central Bank into its first major intervention since it sold an estimated $12 million to $13 billion in two days during the height of Russia's military conflict with Georgia last month.

"The move from a fixed-currency regime to a more flexible one is part of the Central Bank's long-term strategy," said Vladimir Osakovsky, a Moscow-based analyst at UniCredit.

"But we have growing political risks in Russia, which have caused capital outflows. Due to this, the volatility turned out to be much greater, and the Central Bank is playing the role of a stabilizer of extremes."

The ruble closed at around 30.39 versus the basket. "It seems that the Central Bank's offer is located around 30.40 to 30.41 rubles to the basket," said a dealer at a major foreign bank in Moscow.

Russian asset prices have been slashed by the outflow of foreign capital, with foreign investors spooked by the TNK-BP conflict, an unexpected government attack on Mechel, and the military conflict with Georgia and the subsequent souring of relations with the West.

A fall in oil prices from their July peak also weighed heavily. Oil and gas shares account for more than half of the RTS Index.

Da Vinci's Orlov said the stock market was rife with rumors that investment committees had decided to pull more money out of Russia in anticipation of redemptions, and would not reverse their position until the scale of further outflows became clear.

Analysts at BNP Paribas said Thursday's data on gold and foreign exchange reserves indicated a further $2 billion in capital had left Russia last week, adding to outflows of more than $20 billion since the start of the conflict with Georgia.

"Most likely, when people saw that the Central Bank was defending the ruble at a certain level, the potential for further appreciation [of the basket] disappeared," Osakovsky said. "It's impossible to play against the Central Bank, taking into account that it has over half a trillion dollars of reserves."