Russia signals depreciation of ruble


By Charles Cloverin
Financial Times, London
Tuesday, November 11, 2008

MOSCOW -- Russia's central bank signalled on Tuesday it was prepared to allow a sharp depreciation of the rouble as it lowered the floor at which it would defend the struggling currency, while capital outflows from the country took their toll on foreign exchange reserves.

The rouble fell by 1 per cent on Tuesday against the combined dollar/euro basket of currencies after the central bank lowered the floor by the same amount.

This was the first time since 2005 that the central bank has lowered the limit at which it will defend the rouble by selling its foreign currency reserves.

The central bank faces the danger that, by signalling a devaluation may be on the cards, it may spark a run on the rouble. Russia's stock market on Tuesday fell more than 10 per cent, and trading was halted briefly. Traders estimated the central bank had to sell $7 billion to keep the rouble stable at its new level, of 30.79 against a basket of 55 per cent dollars and 45 per cent euros -- its weakest level since the new basket was introduced in February 2007.

The move comes after statements by Sergei Ignatyev, the central bank governor, indicating that a further devaluation was possible. "I do not rule out more flexibility in the rouble exchange rate with some tendency toward a weakening of the rouble against some foreign currencies in current conditions," he said on Monday.

A large devaluation could expose the government to serious political consequences. A poll released last week by the Levada Center, a Moscow sociological research agency, found that the approval rating of both Dmitry Medvedev, president, and his prime minister, Vladimir Putin, fell in October by 7 per cent and 5 per cent respectively because of the economic crisis -- though both ratings remain at near historic highs.

But holding the rouble stable may ultimately be futile as the price of oil, Russia's main export, falls and international credit markets dry up, analysts said. Rory MacFarquhar of Goldman Sachs in Moscow said Tuesday's step was necessitated partly by the costs of defending the rouble at its previous level.

"It's the first time since 2005 that they have made a move that would weaken the exchange rate," he said.

The central bank has lost $112 billion in reserves since they peaked at $597 billion in early August. "The policy of holding the rouble within a band against the basket, which was originally designed to slow the appreciation of the currency, has rapidly mutated into a defence of an overvalued exchange rate with the decline in oil prices and the global sudden stop in capital flows."

Previous modifications to the rouble's euro/dollar trading band were designed to prevent the currency from appreciating, rather than depreciating, as foreign money poured into oil-rich Russia. But now, with oil prices falling, Russia probably faces a current account deficit.

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