Ruble Sinks to Historic Low

The ruble sank to historic lows versus the euro and the dollar on Wednesday as the end of major corporate tax payments freed up speculators to test the Central Bank's new currency boundaries.

On Wednesday the ruble fell by a record 2.5 percent to 38.75 -- its weakest since the current basket compositions was set at 0.45 euros and 0.55 dollars in 2007.

Russia finished widening its target corridor versus a euro/dollar basket last week in a bid to cap a steady devaluation that has knocked a fifth off the ruble's value since November.

Keeping the ruble's depreciation gradual has cost Russia some $200 billion, or a third of its reserves, and not all analysts are convinced that the Central Bank will be able to defend the new boundaries without extra expenses.

Dealers said the ruble had drawn support from companies needing cash in the currency to make tax payments.

But with most duties now paid, ruble liquidity remains strained in a sign that people, companies and banks are not yet convinced it has found its floor and prefer to keep money in foreign currency.

The new trading boundaries of 26 to 41 against the basket allow scope for depreciation of a further 5.5 percent.

"The Central Bank was believed [about the new boundaries] but look at the levels -- there is still two rubles to go and we need to grab them. We will aim for that. We won't get to 41 today, but by early next week we will definitely see it," said a dealer at a European bank in Moscow.

The ruble hit a record low of 45 per euro, and weakened to 33.80 versus the dollar -- its lowest since Russia began to open up its markets to the world in 1990s.

"As soon as the tax payments finished market participants went back to their old game, pushing the ruble exchange rate lower," said Gintaras Shlizhyus, analyst at RZB.

"In the current situation the Central Bank has two choices. The first is to let the ruble push to 41 and to try and halt it there with interventions. ... [But] I think the most sensible choice would be to let the ruble float freely."

A free float of the ruble is Russia's medium-term goal. But risking a big one-off depreciation is a thorny political issue.

Proponents of the free float argue that such a currency policy would stop Russia using up all of its foreign currency reserves in a battle against market speculators.

Others, however, point out that the ruble is now not far off fair-value levels and that the Central Bank still has plenty of cash to keep exchange rate moves ordered.