Ruble Allowed Its Biggest Drop in 3 Months

ReutersThe Federal Reserve said Wednesday it would print dollars to boost liquidity.
The Central Bank allowed a devaluation of the ruble for the second time this week on Wednesday, allowing it to lose almost 1.4 percent of its value against the currency basket, its biggest devaluation in three months. While the ruble plummeted against the euro, it lost little against the dollar, which sank on news of a Federal Reserve rate cut in the United States.

Currency analysts expect the devaluations -- which have now occurred seven times since Nov. 11, usually at a rate of about 1 percent -- to become deeper and more frequent.

News of the Fed cutting interest rates to almost zero Tuesday drove the dollar down overnight, keeping the ruble at 27.56 per dollar at 5 p.m. Wednesday, two cents lower than a day before. The ruble fell to 38.87 versus the euro, from 37.87 yesterday, and almost 1.37 percent to 32.64 against the basket.

The Central Bank said in a statement that it had widened the ruble's trading band, without giving an exact figure. However, it appeared that the band was widened by 40 kopeks at each end. Previous devaluations saw the trading band widened by 30 kopeks at each end.

"It appears the Central Bank favors widening the basket on days when the euro is strengthening," said Yelena Rybakova, chief economist at Citibank. "If the main concern regarding the sharp devaluation of the ruble is its effect on individual [Russian] depositors, it is of course better to do it on the days and weeks that the euro is strengthening."

Based on the price of 12-month non-deliverable forward contracts, the ruble may fall as much as 21 percent to 35.02 per dollar. Marina Vlasenko, senior CIS credit analyst for Commerzbank, said market participants were predicting frequent and sharper devaluations of the currency in January.

"We aren't ruling out some surprises, however," she said.

The interest rate cut coincided with the Fed's announcement on Wednesday that it would print as much currency as necessary to bring liquidity to U.S. credit markets, and with U.S. President-elect Barack Obama's economic advisory meeting to discuss a two-year economic stimulus package worth between $600 billion and $1 trillion.

The decisions regarding Obama's bailout package would have a greater effect on the markets than a monetary measure such as the rate cut, Rybakova said.

"[The rate cut] is an important signal that the Fed is ready to provide liquidity, but I think fiscal measures will jump-start the economy before the monetary measures do," she said.

While weakening the dollar, the rate cut did give commodities their first boost in days. In New York, oil rose as much as $1.15 to $44.75 a barrel Tuesday, and OPEC's decision to cut oil output by 2.2 million barrels per day is also expected to boost oil prices -- if not the ruble.

"At the moment, the behavior of the ruble rate is more dependent on the Central Bank policy than fundamentals," Vlasenko said. "OPEC's decision to cut supply, even if it does have a positive fundamental effect on foreign investment flows, still might not have a lasting effect on the ruble rate."

Vlasenko said the biggest uncertainties lay in how low the Central Bank would allow the ruble to fall, or what level the currency would find if it were allowed to devalue on its own.

"It seems that each [slight] devaluation increases the need for another devaluation," she said. "The Central Bank is provoking expectations of further devaluations on the market each time it increases its pressure on its currency reserves."

Rybakova said the recent news of a 10.8 percent drop in industrial output in November will force authorities to decide how much they are willing to lose defending the ruble.

"The dramatically negative real sector statistics should serve as a wake-up call that the economy is being suffocated by high interest rates," Rybakova said. "I don't think the authorities are ready to sacrifice the hope of having positive growth next year for the sake of defending the ruble's current level."