Trade in Rubles Likely a Long Haul

MTThe country's weakening currency, as well as capital flight, will likely stymie hopes for international trade in rubles.
The country's campaign to do more international trade in rubles, spurred by persistent pressure on its currency, is likely to prove a long haul with the chances slim of persuading any major players to sign up soon.

Moscow spent tens of billions of its hard currency reserves in recent weeks to defend the ruble from falling oil and stock prices and a broad-based flight from emerging markets, prompting policymakers to cast around for new ideas.

Belarus on Tuesday pledged to discuss settling oil and gas trades with Russia in rubles, Prime Minister Vladimir Putin talked about the possibility of bilateral trade with China in national currencies and the use of the ruble was expected to be discussed at the G20 meeting over the weekend.

"We need to take practical steps to strengthen the role of the ruble as a currency for international settlements. And to move to settlement in rubles ... for oil and gas," President Dmitry Medvedev said in an address to the State Duma on Nov. 5.

The world's second-largest oil exporter has accumulated reserves of nearly $600 billion during an oil and gas boom, but those reserves have fallen by one-fifth in the last three months, and falling oil prices may make them hard to replenish.

For the trade scheme to help, however, it will need bigger buyers of the ruble than Belarus and Kazakhstan, which account for 4.9 percent and 3.4 percent of Russia's exports, respectively.

Analysts say that in the short term further devaluations of the ruble are likely after the Central Bank gave in and let the currency ease 1 percent this week.

"[Ruble-denominated trade] would be a good idea if it could be realized, especially because now there is a lot of concern in the world about the stability of the dollar," said Natalya Orlova, chief economist at Alfa Bank.

"But we don't have sufficiently large political partners who would agree to trade in rubles and hold rubles as a reserve currency. Those who would agree, like Belarus, are too small."

The European Union is Russia's largest trade partner.

Most other energy producers are sticking with the dollar and the status quo, though Iran has said it gets most of its oil income in euros and yen, and Venezuela has also opened some oil contracts in euros during the dollar's fall earlier this year.

The country's resource-dependent economy means that the ruble's fortunes are closely tied with those of the oil price, potentially a big negative for its aspirations as an international currency.

"Our trading partners should understand what the ruble is and what its risks are," said Stanislav Ponomarenko, head of Russia research at ING.

On the flip side, oil and gas also give Russia some muscle, and there are signs that the state is putting pressure on local companies to boost the role of the ruble.

"You cannot imagine how much pressure we have been facing recently to switch to rubles. We are being told it must happen at least with all of our term deals with foreign majors," said a trader with a major Russian oil firm.

"The first step will be with the neighbors, at least Belarus and Kazakhstan. That could happen as soon as next year."

Even if Russia succeeds in persuading some partners to trade in rubles, analysts said this may not be enough to override downward pressure on the currency.

"I think that the drivers of the ruble -- oil and capital flows -- will not change, even if the denomination of some of the flow is changed," said Roderick Ngotho, FX strategist at UBS, which does not rule out a 20 percent depreciation of the ruble against the basket in the next 12 months.