|Ruble Falls to 11-Year Low as Speculators Push to Break Target|
|February 02, 2009|
By Emma O’Brien
The ruble slumped to its weakest level against the dollar in 11 years as investors speculated Russia will be forced to give up its currency defense after draining reserves.
The ruble lost as much as 1.7 percent to 36.3550 per dollar, nearing the weakest end of a trading range widened by the central bank less than two weeks ago. Bank Rossii Chairman Sergey Ignatiev pledged on Jan. 22 to use reserves to keep the currency at a level of 41 against a basket of dollars and euros, which translated to 36 per dollar. Based on current euro-dollar rates, the ruble would need to fall to 36.45 per dollar to break the band, according to Merrill Lynch & Co. A central bank spokesman declined to comment.
“The pace of the move to the target is definitely going to be a source of concern to the central bank,” said Martin Blum, head of emerging-market economics and currency strategy at UniCredit SpA in Vienna. “Global risk appetite is continuing to deteriorate so the pressures on the ruble will continue.”
The ruble slumped 35 percent against the dollar since August as a 63 percent drop in Urals crude oil prices and the worst global economic crisis since the Great Depression spurred investors to withdraw about $290 billion from the country, according to BNP Paribas SA.
Bank Rossii expanded its trading range for the ruble 20 times since mid-November before switching policy to let “market” forces help determine the exchange rate within a widened limit. The new trading band would only be extended should oil, Russia’s biggest export earner, fall to $30 a barrel and stay there “for a long time,” Ignatiev said at the time.
Prime Minister Vladimir Putin said in a Jan. 25 interview with Bloomberg Television that Russia had set itself apart from other countries by using reserves so as not to “crush the national currency overnight,” avoiding a repeat of the crisis a decade ago when the ruble plunged as much as 29 percent in a day as the government defaulted on $40 billion of debt.
The central bank raised its benchmark one-day and seven-day interest rates through loan auctions on Jan. 30 to make borrowing money to speculate on the ruble more expensive. Bank Rossii lent 7.7 trillion rubles ($213 billion) to Russian banks in so-called repo auctions last month, aiding the ruble’s depreciation as lenders converted the funds into foreign currency, according to UniCredit and ING Groep NV.
Russia reduced its foreign-currency reserves, the world’s third-largest, by more than a third to $386.5 billion since August as it sold dollars and euros to stem the ruble’s depreciation. The central bank, which was offering foreign currency from Jan. 28 to 30, is yet to be seen making offers on the market today, said Evgeny Nadorshin, senior economist at Trust Investment Bank, citing the Moscow-based lender’s currency traders.
The ruble was 0.9 percent weaker at 36.0393 per dollar and 0.5 percent lower against the basket at 40.4777, which is 1.3 percent away from the target limit of 41, as of 1:09 p.m. in Moscow. It dropped 0.3 percent to 45.9030 per euro.
Russia manages the ruble against a basket made up of about 55 percent dollars and the rest euros to limit currency swings that disadvantage Russian exporters. The basket rate is calculated by multiplying the ruble’s rate to the dollar by 0.55, the euro rate by 0.45, then adding them together.
The dollar’s strength accelerated the ruble’s depreciation against the U.S. currency. The dollar gained against all 16 major currencies tracked by Bloomberg today, except for the Mexican peso and Japan’s yen, climbing 0.5 percent to 1.2745 per euro.
The 41 target to the basket and the 36 per dollar level were based on an exchange rate of 1.3 per euro, Ignatiev said Jan 22. Based on the dollar at 1.2750 per euro now, the ruble’s threshold against the U.S. currency is about 36.45 per dollar, said Yulia Tsepliaeva, chief economist in Moscow at Merrill Lynch.
“Ultimately, if capital flight is sustained they would have to let the ruble band move again or shift to a free float,” said UniCredit’s Blum said. “But I assume they’ll try to hold it for a little while just to maintain their credibility.”
Though the ruble is now the only legal tender in Russia, many mortgages, loans and rental payments are still denominated in dollars. Russians gauge the health of the economy based on the fate of the dollar-ruble rate and so it is important that the trading range is maintained, Arkady Dvorkovich, President Dmitry Medvedev’s economic adviser, said in an interview from the World Economic Forum in Davos, Switzerland, last week.
“They put a line in the snow, which was ridiculous given commodity prices are still falling,” said James Fenkner, managing partner at Moscow’s Red Star Asset Management, which is shorting Russian financial stocks until the devaluation is completed. “The ruble will be beaten down over the next couple of months.” A short position is a wager an asset or holding will decline.
Urals crude fell 2.9 percent to $44.24 a barrel last week, below the $70 average required to balance Russia’s current 2009 budget. Putin has demanded this year’s budget be revised to take account of an Economy Ministry forecast for oil to trade at an average $41 a barrel. Finance Minister Alexei Kudrin said last week Russia will probably have growth near “zero” this year.
Along with increasing interest rates, Russia is “probably days away” from instituting some kind of controls on transfers of currency out of the country, Fenkner said. “They’re going to really reign in money supply,” he added.
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