Published on Bloomberg.
- Ruble Devaluation Looms on Oil; Troika Sees 30% Drop
By Emma O'Brien and Ye Xie
Nov. 10 (Bloomberg) -- Russia's currency reserves, the third-biggest in the world, are no match for tumbling oil prices and an exodus of capital that may force the central bank to accept a devalued ruble.
Just 10 years ago, Russia let the ruble fall as much as 71 percent as the government defaulted on $40 billion of debt and world stock and bond markets collapsed. Now, the combination of a 61 percent drop in oil prices from their peak in July, slowing economic growth and increasing investor concern about emerging markets are draining Russia's foreign reserves, which fell 19 percent to $484.6 billion in the 12 weeks through Oct. 31.
Russia, which uses reserves to curb swings in the ruble that hurt the competitiveness of exports, may find the resistance futile after the currency fell 13 percent against the dollar since Aug. 1. The central bank sold a record $40 billion in October, according to Moscow-based Trust Investment Bank. Troika Dialog, the country's oldest investment bank, said the currency may slump as much as 30 percent in the event of a devaluation.
``When oil falls, capital runs out of Russia and the ruble weakens, it's not justified to hold your positions,'' said Anas El Maizi, who oversees $342 billion in fixed-income assets in Paris at Axa Investment Managers, a unit of Europe's second- largest insurer. ``If oil stabilizes at this level, Russia will have some trouble.'' Axa cut its Russian bond holdings in August.
Long-Term Capital
Bank Rossii, the central bank, may ``gradually'' widen its ruble trading band if the current account falls into a deficit next year, Arkady Dvorkovich, an economic adviser to President Dmitry Medvedev, said Nov. 7. Goldman Sachs Group Inc. said the comment marked a ``departure from the previous party line.''
The ruble rose 0.2 percent to 26.9690 per dollar as of 11:08 a.m. in Moscow, from 27.0304 on Nov. 7. Against the euro, it dropped 0.5 percent to 34.5459, from 34.3773.
When Russia defaulted in August 1998, it caused an investor stampede to the safest assets. Yields on 10-year U.S. Treasury notes dropped more than half a percentage point to 4.98 percent that month and the Standard & Poor's 500 Index slumped 15 percent. Hedge fund Long-Term Capital Management LP collapsed after losing about $4 billion, prompting a Federal Reserve- backed bailout by Wall Street. Gross domestic product in Russia shrank 6.5 percent and inflation accelerated to 84 percent.
100 Billionaires
Since then, rising prices of oil, gas and metals such as nickel and aluminum provided Russia with 10 years of economic growth under former President Vladimir Putin and his hand-picked successor, Medvedev. Foreign reserves grew to $598.1 billion in August, the world's biggest behind Japan's and China's, from $18.4 billion just before the 1998 default.
With average economic growth of about 7 percent a year since 1999, rising commodity and stock prices created more than 100 Russian billionaires, including aluminum magnate Oleg Deripaska and soccer club owner Roman Abramovich. In December last year, Time magazine named Putin ``Person of the Year'' for bringing his country ``roaring back to the table of world power.''
Russia's current account, the widest measure of flows in goods and services, is now headed toward a deficit. Investors pulled at least $140 billion out of the country in the past three months, according to BNP Paribas SA, sending the dollar- denominated RTS Index of stocks down 61 percent.
The benchmark 30-year government bond slumped in 2008, pushing the yield to an almost seven-year high of 12.55 percent on Oct. 27. So far this year, the RTS Index lost 67 percent, headed for the worst performance since 1998.
Growth Slows
``With the oil price falling we were concerned that the trajectory of Russia's reserves had changed from building them up to selling them,'' said Kieran Curtis, a fund manager in London at Aviva Investors Ltd., which cut Russian holdings in August from the $787 million of emerging-market assets it has under management.
Russia is poised to grow 7.7 percent this year, the Economy Ministry said Oct. 29, down from 8.1 percent in 2007. Gross domestic product will expand 5.4 percent in 2009, according to a Bloomberg survey of 14 economists.
The combined wealth of Forbes magazine's 25 richest Russians fell more than 50 percent in four months, based on the equity value of stocks and analysts' estimates.
Bank Rossii, headed by Chairman Sergey Ignatiev, began managing the ruble's exchange rate in February 2005 against a currency basket comprised of about 55 percent dollars and 45 percent euros. Policy makers let it trade within a fixed range in mid-May. Since then, it has dropped 2.2 percent against the basket to 30.39. Though the central bank doesn't reveal the limits of the band, BNP Paribas considers 30.40 to be its weaker end.
No `Sharp Devaluation'
``You can't stimulate a slowing economy by keeping the currency fixed,'' said Lars Christensen, head of emerging- markets currency strategy in Copenhagen at Danske Bank A/S. ``They will have to change their attitude to using reserves for the sake of the economy.''
Dvorkovich increased speculation that Russia will reduce its interference in foreign exchange last week when he told reporters in Moscow a ``prolonged'' period of deficit in the current account may prompt policy makers to ``gradually'' widen the trading band.
The current account, now at a surplus of $91.2 billion, may swing into a deficit as early as next year, though there will be no ``sharp devaluation'' in the ruble in 2008 or in 2009, Dvorkovich said.
Tumbling Crude
``These remarks mark a departure from the previous party line among top officials that there was no reason for the ruble to depreciate,'' Rory MacFarquhar, a senior economist at Goldman Sachs in New York, wrote in a note Nov. 7. ``They confirm our view that there is a strong political preference for gradual depreciation over a steep devaluation, even though the central bank would prefer the latter approach.''
Urals crude, Russia's export oil blend, rose to an all-time high of $142.94 a barrel in July. For the past three weeks, it has averaged $61.74, below the $70 mean price that Finance Minister Alexei Kudrin said in September the government will need to balance its budget next year. It traded at $57.08 today.
``Without an increase in oil prices or an improvement in the capital account of the balance of payments, the central bank will eventually have to devalue,'' Evgeny Gavrilenkov, Troika Dialog's Moscow-based chief economist, wrote Nov. 7. An average price for Urals crude of $60 a barrel ``would imply a devaluation of the ruble against the bi-currency basket by 25 to 30 percent,'' he said.
BRICs Cooperate
Russia's reserves are 25 times bigger today than what it had on the eve of the default, central bank data show. The world's biggest energy exporter, Russia still earns $700 million a day from oil, compared with $100 million 10 years ago, according to Chris Weafer, chief strategist in Moscow at UralSib Financial Corp., Russia's biggest privately owned bank.
``The market is getting overly bearish,'' said Michael Ganske, head of emerging-markets research in London at Commerzbank AG. ``This is a temporary phenomenon and the ruble will stay stable until investors realize the value.''
Brazil, Russia, India and China, the so-called BRIC nations, plan coordinated measures to increase trade and capital flows between their economies, Kudrin said in a Nov. 8 interview in Sao Paulo. Russia, the world's second-biggest oil producer, will also pursue an ``independent'' strategy on production, ignoring the Organization of Petroleum Exporting Countries' moves to cut output, he said.
Gazprom, Norilsk
While Russia's plight 10 years ago reflected an economy emerging from communist control, the turmoil today is part of a crisis hurting nations worldwide as a shortage of credit prompts investors to sell higher-yielding assets in favor of the safest securities.
OAO Gazprom, Russia's natural-gas exporter, said Oct. 22 it may have trouble getting new loans and refinancing debts even after posting record earnings. OAO GMK Norilsk Nickel, the world's largest producer of the metal, posted a 33 percent decline in first-half earnings on Oct. 3 as demand slumped.
Russians are taking note. Svetlana Malyarevich, a Moscow- based accountant, says she considered changing some of her savings into foreign currency after people in her office said the ruble might slide to 40 per dollar.
``People who have ruble accounts understand that their savings decline if the dollar rises,'' the 36-year-old said. ``The security of my money is directly dependent on the economic situation in Russia.''
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