Central Bank Lets Ruble Fall Further

The Central Bank said Monday that it widened the ruble's trading band by 30 kopeks on both ends for the second time in two weeks, effectively allowing a gradual devaluation of the currency to continue.

The Kremlin and Central Bank have said there will be no sharp devaluation, which would carry considerable political risks. But a weakening of the currency would help make Russian exports more attractive and slow the rate at which the country has to burn through its foreign exchange reserves.

Russian markets seemed to ignore the devaluation, with the MICEX Index soaring 17 percent and the RTS Index gaining 7.7 percent, following a strong rally in New York on Friday and a U.S. bailout agreement with Citibank on Sunday. The ruble was trading at 27.41 to the dollar at 7:45 p.m. in Moscow, a gain of 0.4 percent from Friday's official 5 p.m. close of 27.51, while the euro was down 1.9 percent to 35.23, from 34.57. The basket had fallen to 30.89 rubles, down 0.75 percent, from 30.66.

The decline Monday left the ruble 0.7 percent lower against the Central Bank's dollar-euro basket, falling through the 30.70 level, considered the previous low end of the range. On Nov. 11, the Central Bank also widened the basket by 30 kopeks on either end, letting the ruble fall from the previous support level of about 30.40. The basket is composed of 55 percent dollar assets with the rest in euros.

The gradual nature of the devaluation has drawn fire from some corners, as it encourages traders to bet against the currency and has forced the Central Bank to spend its foreign exchange reserves to defend the ruble. Not all analysts even agree that the state needs to let the ruble weaken, but most say the measure is necessary given the downward direction of oil prices.

"They have to increase this band because Russia has an oil- and gas-fired economy, and oil is now down 60 percent from its high," said James Fenkner, director of Red Star Asset Management. "They're still bleeding reserves, and the reason they're bleeding is because exchange rates are too strong."

In the past two months, the state has spent $57 billion to keep the ruble from falling below the low end of the basket, and it will have to continue dipping into reserves if it allows the ruble to weaken gradually.

"The real trade off here is between the amount of reserves they're going to have to spend and the population. The devaluation basically cuts Russians' wealth down by the amount of the devaluation," Fenkner said. "But the [slow depreciation] gives people the chance to exchange rubles into dollars. As the state allows the people to convert out, it loses in reserves."

Eugene Belin, head of fixed income at Citibank in Moscow, said the gradual policy could be vindicated if the dollar's strength also starts to wane.

"In that case, the gradual policy of the Central Bank, which does not generate so much volatility, will prove to have been the right one," Belin said, adding that Russia's well-stocked reserves gave it the freedom to devalue the currency on its own timetable.

"They're in a very lucky position to have [a gradual depreciation] as one of their options," he said. "They're one of the few places in the world that has the luxury of being able to choose how they do it."

Fenkner, of Red Star Asset Management, said any sharp depreciation would likely have negative political consequences. He cited the dismissal of Prime Minister Sergei Kiriyenko during the 1998 crisis as an example.

"I still think there's an extremely high possibility that a big change in the ruble would mean a shift in the top leadership of the Russian government," Fenkner said. "I would bet Medvedev will take the heat for this one."

Yevgeny Nadorshin, an economist at Trust Investment Bank, said he expected the state to widen the band by steps of 30 kopeks in each direction at least twice more before the end of the year. He said he disagreed with expansion of the trading band, as the Central Bank had begun "too early and too fast."

The move, Nadorshin said, could lead to a "decrease in economic growth, a further decrease in long-term investments and more speculation on the ruble."

And while the devaluation is bad news for domestic retailers facing a likely revival of inflationary pressure, the country's exporters say they'll be better poised to compete abroad at the new exchange rate.

"The sharper and quicker the devaluation happens, the better it is for us," said Pavel Danilin, head of investment relations at Polymetal, Russia's biggest silver producer.

Alexei Sotskov, spokesman for TMK, the country's biggest pipe maker, said TMK would also like to see a strengthening of the dollar against the ruble. "Up to half of our products will be sold abroad next year," he said.

Staff Writer Nadia Popova contributed to this report.

Tracking the Ruble

The Central Bank allowed the ruble to weaken Monday for the second time in two weeks, with analysts saying the move is likely part of a gradual depreciation policy.
The currency has now lost about 6 percent versus the basket from its historic peak, set just before the military conflict with Georgia in August.

BASKET

The Central Bank introduced a euro-dollar basket for tracking the ruble's course on Feb. 1, 2005, initially made up of 0.1 euros and 0.9 dollars. The euro's share was gradually increased to reach the current 0.45 euros and 0.55 dollars composition on Feb. 8, 2007.

FOCUS

The Central Bank used keen investor appetite for the ruble to allow gradual appreciation as a means of fighting inflation until early August, when the trend reversed, prompting it to switch from slowing appreciation to supporting the currency.
Authorities have now said their immediate focus has switched from fighting inflation to supporting the economy and markets.

RESERVES

Russia's gold and foreign exchange reserves, the world's third-largest, give it a powerful weapon against speculators betting on a weaker ruble.
But the value of the cash pile has fallen by more than $100 billion since early August to stand at $484.6 billion on Oct. 31.
Analysts have said such rapid decreases in reserves are unsustainable, especially given weaker oil prices that slow inflows of new money and potentially signal demands on reserves from future years' budgets.

KEY RUBLE MOVES

June 26, 2007: appreciation of roughly 10 kopeks, or one-third of a percent; traders say the Central Bank's bid level for the basket is established at about 29.81 rubles
Aug. 8, 2007: appreciation of roughly 10 kopeks, or one-third of a percentage point, to 29.71 rubles
Aug. 9, 2007: appreciation of roughly 5 kopeks or 0.17 percent; the Central Bank's bid level is seen at about 29.61 rubles
June 10, 2008: appreciation of roughly 12 kopeks, or one-third of a percentage point; the Central Bank's bid level is established at about 29.51 rubles
July 9, 2008: appreciation of roughly 10 kopeks, or one-third of a percentage point
July 14, 2008: appreciation of roughly 15 kopeks, or 0.48 percent
July 15, 2008: brief appreciation to 29.28 rubles; dealers say the Central Bank's bid level is seen at about 29.25 rubles
Aug. 4, 2008: appreciation to a new high of 29.26 rubles, though the Central Bank's bid level is not breached
Aug. 8-11, 2008: the ruble sells off sharply during Russia's military conflict with Georgia; the Central Bank sells an estimated $12 billion to $13 billion to stop the basket from weakening beyond 30.10 rubles.
Sept. 4, 2008: having let the ruble weaken beyond 30.10 on Sep. 3, the Central Bank steps in to defend 30.40 to 30.41 rubles; dealers estimate it sold up to $4 billion. The Central Bank continues to defend that level with regular interventions in the following weeks.
Nov. 11, 2008: the ruble is allowed to weaken, stabilizing at about 30.70 to 30.71 rubles, with the Central Bank saying it has widened the trading corridor by 30 kopeks in each direction; the move comes a day after the Central Bank Chairman Sergei Ignatyev said he did not rule out more flexibility in the exchange rate and that some ruble weakness was possible.
Nov. 24, 2008: the ruble is allowed to weaken as far as 31 to the basket; the Central Bank says it had widened the corridor by another 30 kopeks in each direction. Market participants say further gradual devaluation is likely.

-- Reuters