Russia Softens Its Line on the Country’s Currency

Despite the desire from the Russian authorities to portray the country as not very sensitive to contractions in price and demand for its core exports (oil, gas and metals), and relatively isolated from the global turmoil ; the reality is that the downturn in the developed economies is clearly affecting the performance of Russia’s developing economy although it is still unclear as to what extent.

Russia’s Central Bank, in a clear sign of softening its once-firm stance in defense of the country’s currency exchange rate, said Tuesday it allowed the ruble to weaken about 1% in each direction against its dual euro/dollar currency basket (Russia pegs the ruble to a basket of the dollar (55%) and the euro (45%), permitting it to float only within a range of 4 pct and intervening if necessary). Central Bank of Russia set the official rate of exchange at 27.34 ruble per/dollar, allowing the ruble to depreciate by 0.376 ruble. The euro worth increased by 0.2387 ruble to 34.8 ruble. The worth of bi-currency basket ($0.55 and euro 0.45) gained 0.31 ruble to 30.7 ruble. The bi-currency basket hasn’t cost so much this year. The move quickly prompted investors to push the ruble to the lower limit, forcing the central bank to intervene by spending as much as $7 billion just to keep the currency from falling further.

Constant ruble selling, capital outflows and greenback appreciation has drained so far more than $100 billion from the country’s reserves since August and pressure is mounting. The rumors are that the dollar will cost 40 ruble in the near term.

“Today’s move has only served to raise market expectations of a further devaluation,” Renaissance Capital economist Alexei Moiseyev said in a note Tuesday. [WSJ]

In recent weeks, Russia’s hard foreign currency reserves have dropped at a record pace as the country keeps spending billions of dollars to keep the ruble from plummeting and the banking sector from melting down (between 20 and 40 banks could need bailing out). The reserves have diminished substantially in the past few weeks because of the investors’ flight from Russia. The foreign exchange reserves dropped more than $30 billion in one week during October. According to WSJ – late Monday, Prime Minister Vladimir Putin gathered top bankers, finance officials and the heads of law-enforcement agencies to issue a stern warning that the Kremlin’s aid funds were strictly meant for the country’s economy and that those caught taking them out of Russia would face harsh sanctions.

If the ruble keeps falling from current levels without finding support, the currency will not only eliminate all the gains made in the past few years, but will also put an effective end to the notion of a Russian economy reasonably well-integrated into the world economy and one which through its stability remains immune to outside economic factors. In addition, and leaving political implications aside, a ruble devaluation would trigger panic among ordinary Russians, who only recently began to regain a sense of confidence in the country’s currency. We are already seeing some signs of economic nervousness. Kommersant Daily is reporting that russians withdrew 80 billion ruble from Sberbank in October, attributing the outflow on rumors about the ruble devaluation.

With Russia’s current account most likely to fall into deficit in fiscal ’09, and with a confidence level in the economy that continues to wane – doubts about Russian economy as an emerging market capable of maintaining its viability – currently remain in doubt. Furthermore, a fragile Russian stock market — now down nearly 70% for the year, combined with a deteriorating currency situation where devaluation seems a very likely scenario, even though the government has pledged not to allow the ruble to fall dramatically, certainly doesn’t improve the situation and the circumstances Russia currently finds itself in.

• Become A Funded Futures Trader