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. Last Updated: 07/27/2016

Ruble Takes a Worrisome Tumble

The ruble plunged 50 kopeks Monday to an all-time low of 27.73 to the dollar, signaling that Russia's currency could be in for a rocky ride in the first quarter of this year.

With the currency dipping further in afternoon trade for tomorrow's settlement, Monday's tale of woe was early confirmation of a warning Central Bank chairman Viktor Gerashchenko sent to then Prime Minister Vladimir Putin in December - that it will become increasingly harder to keep the ruble stable while using hard currency reserves to meet hefty payments on Russia's foreign debts.

The ruble's fall Monday was partly a traditional element of New Year's trading - when little fresh hard currency comes onto the market - but the Central Bank now faced a time of tough choices, said former Deputy Finance Minister Oleg Vyugin.

"The Central Bank can now either sell currency and spend hard currency reserves, or save them and let the ruble devalue," he said.

"The only way to keep the situation stable is for the government to continue to collect high tax revenues and boost the primary [budget] surplus higher," he said. The primary surplus is the budget surplus without taking into account debt servicing payments.

"But the Central Bank is going to have to devalue the ruble and sell dollars anyway," he added.

Vyugin said he expected the ruble to clearly fall below 28 rubles to the dollar by the end of the month.

However, he and other market watchers saw little reason for panic.

The drop in the ruble was due to seasonal factors, including pent up demand for dollars after the New Year's holiday break, said Veniamin Simonov, head of the Moscow Interbank Currency Exchange's analytical-information service, in remarks reported by Prime Tass.

The ruble is likely to stabilize by the end of the week, he added.

Gerashchenko warned Putin in a letter sent to him just weeks before President Boris Yeltsin's New Year resignation elevated Putin to the post of acting president, Arkady Dvorkovich, head of the Finance Ministry's economic expert group, said Monday.

Dvorkovich said the letter was part of an attempt to convince the government to introduce extra measures to protect the state's hard currency reserves, including a plan to make exporters repatriate 100 percent of their hard currency earnings.

"The letter was sent to let Putin know that pressure on the ruble was going to mount in the first three months of the year," Vyugin said.

The ruble is facing a squeeze mainly due to a seasonal drop in export revenues, which is likely to limit the Central Bank's ability to top up its reserves, he said. At the same time, Russia faces foreign debt repayments of $3 billion.

The lack of previously agreed upon refinancing from the International Monetary Fund means that the government can only realistically make those payments by again dipping into Central Bank reserves to do so. Russia borrowed $4.5 billion from the Central Bank last year to help it meet some $10 billion worth of foreign debt payments for 1999.

Even though Russia last year enjoyed the extra hard currency income of a trade surplus estimated at $20 billion, the Central Bank's reserves rose just $500 million for 1999.

Instead, the extra stability that a further rise in hard currency resources might bring has been spent on financing massive foreign debt payments of $10 billion last year, analysts said.

However, many stressed that this policy was logical.

The Central Bank lent $4.5 billion to the Russian government last year and only $210 million of that amount has so far been paid off. That means that hard currency reserves levels by the end of the year could have stood at $17 billion.

Russia faced a similar scenario at the beginning of last year when the immediate prospects of financial aid from the IMF also appeared very bleak and the government started borrowing from the Central Bank.

Dvorkovich at the expert group estimated that the Central Bank might have to lend a further $4.5 billion to the government in the first half of the year when the government has around $5 billion in foreign debts to repay.

In total Russia must pay $10.2 billion in foreign debt this year. $3 billion of that amount falls due in the first three months.

However, Alexei Zabotkin, an economist at investment bank United Financial Group, said there was little real cause to worry about the ruble.

"The [still] high trade surplus will allow the Central Bank to keep on top of debt servicing for the next three months and keep the ruble relatively stable," Zabotkin said.

"Even if export revenues do fall by a third in the first few months, the Central Bank should still be able to collect an extra $1 billion per month that will help Russia pay the $3 billion in debt it needs to in the first three months," he said.

The introduction of a new law proposed by Gerashchenko to make exporters return 100 percent of their hard currency earnings for sale on Russia's MICEX exchange floor would make little difference to the Central Bank's dilemma, Vyugin said.

"The Central Bank would have to print more rubles to buy the extra dollar earnings should this law come into effect. That would also put the ruble under pressure by pumping up the money supply," he said.

Former deputy chairman of the Central Bank Sergei Alexashenko said the introduction of the law would have the reverse effect of forcing exporters to keep hard currency earnings in off-shore zones abroad.

Even though acting President Putin appeared to give his seal of approval to the 100 percent repatriation plan over the weekend, the government on Monday looked to be reconsidering in the face of the scheme's likely pitfalls.

Deputy Prime Minister Viktor Khristenko said the government could postpone making a decision on the 100 percent repatriation rule until the second half of the year.