Ruble Jumpy on Devaluation Worries

BloombergPedestrians walking past signs advertising ruble exchange rates on Friday.

The Central Bank and prominent lawmakers say the ruble does not need to be devalued, but a 10.9 percent drop in gross domestic product and a projected federal deficit of 9.4 percent of GDP are causing some to start second-guessing.

As the ruble closes a volatile week, market watchers are split on what direction the currency will take in coming months, with some saying devaluation is inevitable while others contend that the biggest problem the currency faces is excessive appreciation.

Earlier this month, Duma Deputy Anatoly Aksakov, a member of the Just Russia party and head of the Regional Banking Association, drew fire when he called for a 30 to 40 percent ruble devaluation to avoid tax increases in the face of a growing budget deficit.

Aksakov’s suggestion drew a harsh response from his fellow lawmakers. Duma Speaker Boris Gryzlov said rumors of a coming devaluation were “groundless” and “an attempt to apply the recipes of 1998.”

Other lawmakers were equally scathing in their responses, including Duma Deputy Speaker Vyacheslav Volodin, who said Aksakov’s proposal was “against the people” and “asserted the interests of oligarchs and big business” by undermining the ruble.

On Wednesday, Gryzlov went a step further, telling the Duma’s financial committee to remove Aksakov from the National Banking Council.

It was not the first time government officials vociferously denied claims of a weakening ruble. Last fall, when the currency started wobbling as the full extent of the financial crisis began to be apparent, state-owned Channel One ran a long segment ridiculing people who believed in “rumors” of a devaluation, comparing them to pensioners stockpiling 20-kilogram bags of salt on speculation of a future shortage. The report then accused a Georgian web site of spreading the rumors in a malicious campaign of “black PR.”

Two weeks later, the Central Bank announced the first in a series of devaluations that would see the ruble drop a total of 36 percent from its all-time high set in July 2008.

This time, however, could be different. The price of Urals crude oil, Russia’s chief export, which was in freefall when the last devaluation began, is sitting comfortably around $70 per barrel, nearly double its February price.

And while the country’s economy shrank 10.9 percent in the second quarter — the biggest contraction on record, analysts say the overall picture is far healthier than last fall, when the state had to dole out billions of dollars to save key companies from going broke.

“The economy is obviously 11 percent smaller, but in much better shape,” said Roland Nash, chief strategist at Renaissance Capital. “Companies have restructured their debt, businesses have found the necessary capital. The next two quarters will see the highest amount of ruble debt issuance in the country’s post-Soviet history.”

The ruble will probably experience more volatility as the state moves from targeting currency prices to targeting inflation, Nash said.

“But right now, there is more pressure for the ruble to appreciate than depreciate,” Nash said. “Russia’s biggest currency problem in the future could be a strong ruble,” he said.

Investors received a taste of volatility last week, when the ruble fell nearly 2 percent by Wednesday to an August low of 32.37 against the dollar before rallying to close the week at 31.67.

Others, however, saw the ruble drifting lower, as the Central Bank continues to cut rates and the money supply grows.

“There’s a great deal of money going into the system now,” said Elina Ribakova, chief economist at Citibank. “The ruble will get cheaper, the question is — now, or at the end of the year.”

A drop resembling the one the ruble underwent last fall, however, is not in the cards, Ribakova said. She predicted the currency would sink no further than the bottom end of the trading corridor the Central Bank mapped out for it last year.

In January, the Central Bank said it would keep the currency within the 26 to 41 rubles against the dollar euro basket, a range it has not broken since then.

Devaluation would benefit some segments of the economy, like domestic producers, who would see a greater demand for their goods as a result of a cheaper ruble. But the risks of devaluing the currency still outweigh the rewards, said Chris Weafer, chief strategist at UralSib.

“Domestic producers are far too small a segment of the economy to make devaluation worthwhile. And there is always the specter of 1998, and the fear of a run on bank deposits. [Devaluation] is an idea the government is likely to reject out of hand,” he said.

The ruble plummeted over 70 percent in 1998 as oil prices fell into the single digits and the country defaulted on its debt.

And though he feels the ruble is “defendable” at these levels, Weafer said the currency is by no means out of the woods, partially due to its close relationship with oil prices.

“Keep in mind, the ruble is the main petro-currency in the world right now. When the price of oil dipped last week, the ruble dipped right along with it, which should give you an idea of how fragile the currency really is,” he said.