Ruble Drops to Pre-1998 Crisis Low on 6th Devaluation This Year

Ruble Drops to Pre-1998 Crisis Low on 6th Devaluation This Year

By Emma O’Brien

Jan. 19 (Bloomberg) -- The ruble fell below the weakest level seen in the 1998 Russian crisis after the central bank devalued for the sixth time in seven days to protect reserves.

The currency slid to as little as 33.0455 per dollar today, the lowest since early 1998, before the government defaulted on $40 billion of debt. The ruble has lost 7.3 percent since official trading resumed this year, extending the decline to 29 percent since August.

Prime Minister Vladimir Putin pledged last month to use the nation’s foreign-exchange reserves to avoid “sharp” currency swings, after the 71 percent decline against the dollar in 1998 caused investors to flee and savers to pull bank deposits. Investors have withdrawn $245 billion from Russia since August as a 69 percent drop in oil, Russia’s war with Georgia and the disruption to gas exports exacerbated the effect of the global financial crisis, according to BNP Paribas SA data.

“Fear of another devaluation means nobody wants to buy rubles right now,” said Lars Rasmussen, an emerging markets analyst in Copenhagen at Danske Bank A/S, which rates itself among the five biggest traders of ruble in the world through Finnish subsidiary Sampo Bank Plc. “The ruble has begun to look more and more overvalued because of the fall in the oil price.”

Russia’s reserves, the world’s third-largest, have dropped by $171.6 billion to $426.5 billion since August, as policy makers sold currency.

The ruble weakened 1.4 percent to 37.8179 against the basket by 1:29 p.m. in Moscow, extending this year’s drop to 6.8 percent.

Lowered Forecast

Danske lowered its forecast for the ruble today, seeing a further 15 percent depreciation versus the basket to 44.45 in three months, down from a prediction of 38.6 in December.

The quickened pace of devaluations is encouraging investors to place so-called short positions on the ruble-basket rate, Rasmussen said. A short is a wager a security is going to decline.

Non-deliverable forwards predict an 11 percent decline in the ruble to 36.93 per dollar in the next three months. NDFs fix a currency at a particular level at a future date and are used by companies to protect against foreign-exchange fluctuations.

Bank Rossii, which manages the currency against a basket of about 55 percent dollars and the rest euros, widened its target range today, a bank official said. The currency has fallen 29 percent versus the basket since Aug. 1.

The ruble fell to 43.8880 per euro, the lowest since the common currency’s introduction in 1999, and is down 6.1 percent this year.

Crude Prices

Urals crude, Russia’s main export blend, has declined 69 percent to $44.43 a barrel from a record in July, below the $70 a barrel needed to balance the budget this year.

Russia’s MosPrime rate, the average interest rate banks charge to lend money to each other, rose to a two-month high of 12.5 percent today, according to the central bank.

To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net

Last Updated: January 19, 2009 05:39 EST

-------------------------------
Buy Gold & Silver

Russians Buy Jewelry, Hoard Dollars as Ruble Plunges - USA next?

Austrian Theory Economists call this the "beginning of the crack-up boom". Russia now, U.S. later? Don't bet against it...

Russians Buy Jewelry, Hoard Dollars as Ruble Plunges (Update1)

By Emma O’Brien and William Mauldin

Dec. 11 (Bloomberg) -- Moscow resident Tima Kulikov banked on the full faith and credit of the U.S. government, not the Kremlin, when he sold his biggest asset for cash.

The 31-year-old director of a social networking Web site initially agreed to sell his apartment for rubles, then cringed at the thought of the currency weakening as it sat in a lockbox pending settlement of the contract. It wasn’t until the buyer showed up with $250,000 stacked in old mobile-phone boxes and stuffed in his pockets that Kulikov closed the deal.

“The exchange rate we agreed on wasn’t great, but I did it because the money’s going to lie there for a month,” Kulikov said. “Put it this way, the ruble’s more likely to have problems than the dollar.”

Russians are shifting their cash into foreign currencies and buying things they don’t need as the economy stalls and the central bank weakens its defense of the ruble, signaling a larger devaluation may be on the way. The currency has fallen 16 percent against the dollar since August, when Russia’s invasion of neighboring Georgia helped spur investors to pull almost $200 billion out of the country, according to BNP Paribas SA.

The central bank today expanded the ruble’s trading band against a basket of dollars and euros, allowing it to drop 0.8 percent, said a spokesman who declined to be identified on bank policy.

With the specter of the 1998 debt default and devaluation in mind, Russians withdrew 355 billion rubles ($13 billion), or 6 percent of all savings, from their accounts in October, the most since the central bank started posting the data two years ago. Foreign-currency deposits rose 11 percent.

Oligarchs Pinched

Those withdrawals are increasing pressure for the ruble’s devaluation, according to Basil Issa, an emerging- markets analyst at BNP Paribas in London.

Property is now a protective investment, not just a status symbol, said Sergei Polonsky, founder of real estate developer Mirax Group, which is building Moscow’s tallest skyscraper.

“Lately our clients are mostly those who buy real estate not to live in but to secure their investments,” Polonsky said. “No one wants to be left with pieces of paper.”

The 25 wealthiest Russians on Forbes magazine’s list of billionaires, including Oleg Deripaska and Roman Abramovich, lost a combined $230 billion from May to October as asset values plummeted, according to Bloomberg calculations.

‘Feel Happy’

For the burgeoning middle class, investments of choice range from electronics to gold jewelry. Evroset, Russia’s largest mobile-phone chain, is telling people to buy anything they can.

“It’s better to feel happy that you own something than to fear losing the money you have earned,” Chairman Yevgeny Chichvarkin says in a letter posted at 5,200 Evroset stores. “If you need a car, buy a car! If you need an apartment, buy an apartment! If you need a fur coat, buy a fur coat!”

Sales at Technosila, the third-biggest consumer electronics chain, have doubled since September as customers rush to swap rubles for flat-screen TVs and laptops, spokeswoman Nadezhda Senyuk said by phone from Moscow, where the company is based.

Jewelry sales are also accelerating, particularly items made of gold and diamonds, said Vladimir Stankevich, advertising director at Adamas, Russia’s third-largest jewelry retailer.

“More cash appeared on the market and there’s an opinion among shoppers that gold is a good investment in times of crisis,” Stankevich said.

Natalya Kulikova has a different approach. The 31-year-old sales manager said she’s opened accounts in rubles, euros and dollars at three different banks -- one foreign and two domestic -- to guard her savings.

“My main goal is to save money,” she said.

Putin Pledge

Those who don’t want to spend are keeping more money at home or in safe-deposit boxes because the government guarantee on bank accounts is limited to 700,000 rubles, said Yulia Tsepliaeva, chief economist in Moscow at Merrill Lynch & Co.

Alfa Bank, Russia’s biggest non-state lender, said demand for boxes has increased about 40 percent since October, and there are few available.

“The Russian experience with saving is not that good and people prefer to consume and enjoy rather than save in pre-crisis situations,” Tsepliaeva said. “Buy cash dollars and put them in mattresses or safe deposit boxes but not in accounts because most crises are accompanied by banking crises.”

A decade ago, many lost their life savings after the ruble plunged 71 percent against the dollar. Those fears prompted Prime Minister Vladimir Putin to pledge not to allow “sharp jumps” in the exchange rate, during a call-in television show Dec. 4.

‘Ideal Time’

Troika Dialog, Russia’s oldest investment bank, is betting the central bank will allow a one-time devaluation of the ruble of about 20 percent in January, following New Year’s and Orthodox Christmas celebrations.

“With the holidays at the beginning of January, companies won’t be fully working and people will be spending more money,” said Evgeny Gavrilenkov, Troika’s chief economist and a former acting head of the government’s Bureau of Economic Analysis. “That means demand for rubles will increase and that means it’s an ideal time to allow a devaluation.”

Russia has drained almost a quarter of its foreign-currency reserves, the world’s third-largest, since August as it tries to slow the ruble’s decline. The central bank has widened the trading band five times in the past month, effectively reducing its defense of the currency amid plunging oil prices.

Devaluation Skeptic

Urals crude, Russia’s main export earner, has slumped 72 percent since reaching a record $142.94 a barrel July 4. It fell below $40 for the first time in three years last week, compared with the $70 needed to balance the country’s budget.

The government will avoid a large, one-step devaluation because it wants to prevent a run on the banks and lure back foreign investors, said Chris Weafer, chief strategist in Moscow at UralSib Financial Corp.

“I’m skeptical a 10 to 15 percent devaluation will provide a significant boost for the economy because the sector that it will most benefit, manufacturing, is just too small,” he said.

The ruble will probably be allowed to drop in small steps to as low as 33 per dollar by the middle of 2009, from about 28 now, Weafer estimates. It will end next year at 26.8 because of a recovery in oil prices and a weaker U.S. currency, he said.

Svetlana Guseva isn’t taking any chances.

The 32-year-old mother of two from the southern city of Sochi plans to take her 8-year-old daughter, Dasha, to Moscow for the New Year’s holiday, a trip that will cost twice her family’s monthly income of about 30,000 rubles.

“This way at least we’ll have some memories,” she said.

To contact the reporters on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net; William Mauldin in Moscow at wmauldin1@bloomberg.net.
Last Updated: December 11, 2008 03:51 EST

-----------------------------
Buy Gold & Silver

A Fast Fall for the Russian Ruble

(source: seekingalpha.com)

The Russian ruble has dropped about 2.5% a month since August, despite being heavily supported by the Bank of Russia. The cause is, of course, the fall in oil prices. About three quarters of Russia’s exports are related to oil, and the revenue generated by oil sales funds much of the government’s budget. They need oil at about $70 a barrel to pay their bills.

The chart below shows a long-run perspective on the ruble:

The chart does not show all of the recent drop in price. A recent price of the Rydex Russian Ruble Trust (XRU) is $35.57 which translates to about a $.0357 price for a ruble.

Some investors fear that a devaluation of the ruble of 25% to 30% is needed to find a stable bottom, and we may see this kind of devaluation if the price of oil doesn’t turn up soon. The Bank of Russia has been supporting the ruble with its own dollar and euro reserves of about $450 billion, but these assets have dropped 25% since they began defending it in August. At this rate, they cannot keep up their defense for another year.

To help staunch the fall of their currency the Bank of Russia has raised interest rates on ruble deposits to 13%, but this has not worked, at least not yet. International hot money flows are in a state of shock for now. Investors are risk averse to a point not seen in decades, so it doesn’t look as if the carry trade will bail them out of their current crisis.

Domestic growth could help some in coping with falling oil prices. Its economy has been in a growth spurt for several years, but many economists expect its internal growth to fall next year---perhaps as low as 3%. This will not be enough to offset the steep decline in oil prices, given their outsized dependence on petroleum products. An expected pipeline from its eastern neighbors through Russia will probably add some revenues in the future, but that will not be enough or in time to help the current situation.

If Russia wants to sustain its growth with domestic spending it needs to adjust its tax base to be less dependent on oil and reform its poor legal infrastructure for financial institutions. A modern banking system is a must for them to move to higher level of development, but much of their present banking structure is a privatized, cosmetic makeover of the old communist system of state owned savings banks. This will not do if they want to shift to a more sustainable model of domestic growth.

For currency investors, the Rydex Russian Ruble Trust has an inception date of 11/10/08, so it doesn't have much of a track record. If I were a gambler, shorting this ETF would be a play that could have a good payoff--if there are enough long positions to support short sales.

Also, the drop in the ruble has ugly consequences for Russian equity shares. The chart below show the Van Eck Russian ETF (RSX) over the last six months.

The fall in the Russian equities market exceeds the magnitude of the fall in the ruble, but the ruble has certainly contributed to the weakness of the stock market.

As with any emerging market, Russia has great promise and great risks. For investors, a long term perspective and high tolerance for risk is required for a play in either the currency or equities market.

Disclosure: Author has no position in either the Russian equities market or their currency.

-----------------

Buy Gold & Silver