Nov. 28 (Bloomberg) — Russia’s ruble headed for its biggest weekly decline against the euro in at least five years as the central bank let the currency depreciate and raised interest rates to halt an exodus of foreign capital.
Bank Rossii widened the ruble’s trading band for the second time this week by about 30 kopeks (1 U.S. cent), or 1 percent, on each side, according to Mikhail Galkin, head of fixed-income and credit research at MDM Bank in Moscow. The central bank said today it will raise its benchmark refinancing rate to 13 percent from 12 percent to help stem currency losses.
Russia is among a handful of countries raising interest rates after it drained $148 billion from the world’s third largest foreign-currency reserves since August to arrest a 16 percent currency slide against the dollar. BNP Paribas SA estimates that investors pulled $190 billion out of the country since August as oil prices fell below the $70-a-barrel average required to balance Russia’s budget in 2009.
“I hope that in the near future the government will weaken the ruble,” Viktor Vekselberg, one of four billionaire partners in Russian oil company TNK-BP, told reporters in Moscow today. “The government’s priority is budget stability but for business the ruble policy is more important.”
The ruble weakened 1.2 percent to 27.7578 per dollar by 2:27 p.m. in Moscow, and depreciated 0.7 percent to 35.6424 per euro. It lost 0.9 percent against the dollar and 3 percent versus the euro this week, the biggest decline since Bloomberg began collecting the data in December 2003.
Confidence in Russia has plummeted as the five-day war with Georgia, seizure in global debt markets and sliding oil prices sparked the worst financial crisis since the nation’s default in 1998, when the ruble plunged 71 percent versus the dollar.
Urals crude, Russia’s main export oil blend, has closed for the past four days below $50 a barrel and was 1.3 percent lower at $48.61 a barrel today.
Bank Rossii keeps the ruble within a trading band against the dollar-euro basket to limit swings that hurt exports. The basket is made up of about 55 percent dollars and the rest euros.
The ruble dropped 1 percent to 31.3041 against the central bank’s basket of dollars and euros today and 1.9 percent this week, the biggest weekly decline since the basket was introduced in February 2005. The weaker end of the band is now 31.30, MDM’s Galkin said.
The central bank has avoided commenting on its actions in the currency market. Spokesman Vladimir Lavrov declined to comment.
“The currency is overvalued in nominal and real terms,” Nouriel Roubini, the New York University professor who predicted the current financial crisis two years ago, said in a Bloomberg Television interview in Moscow today. “How to move to a more flexible exchange-rate regime is going to be one of the most important policy challenges to avoid a hard landing.”
Oil may drop as much as 20 percent next year should the financial crisis worsen, Roubini said.
While most of the world’s central banks are cutting interest rates to ease the worst financial crisis since the Great Depression, Russia along with Iceland, Pakistan and Serbia are having to increase borrowing rates in an attempt to prevent a stampede from their currencies.
The refinancing rate will rise by 1 percentage point on Dec. 1, Bank Rossii said in an e-mailed statement today. The interest rate for one-day and seven-day loans from the bank in repurchase auctions will climb to 10 percent from 9 percent.
The central bank sold as much as $2.3 billion this week to prevent the ruble from falling beyond the weakest perimeter of its trading band, compared with about $7 billion last week, according to MDM Bank estimates.
Policy makers are allowing the currency to depreciate now because there is less selling pressure compared with previous weeks, said Alexei Moiseev, head of fixed-income research in Moscow at Renaissance Capital. Companies have been buying rubles and selling dollars to pay more than 200 billion rubles ($72 billion) of taxes due this week plus more in oil-export tariffs, Moiseev said.
“That eases pressure on the ruble and their reserves a bit,” said Moiseev, who forecasts a decline of as much as 15 percent against the basket next year.
The dollar’s 2 percent decline against the euro this week also allows the central bank to “mask ruble devaluation,” Tatiana Orlova, an economist in Moscow at ING Group NV, wrote in a research note today. ING predicts a drop of 15 percent by the end of 2009.
Troika Dialog, Russia’s oldest investment bank, forecasts a 30 percent depreciation as declining oil prices erode the country’s $91.2 billion current-account surplus.
“The central bank is letting it fall because of oil, reserves depletion, all of that,” said Jon Harrison, an emerging-markets currency strategist in London at Dresdner Kleinwort, which is reviewing its ruble forecast after today’s move. “We can probably expect to see more of this.”
To reduce pressure on the ruble, the central bank also told financial firms yesterday not to increase bets on foreign currencies during December above their average for the past month, in a letter on its Web site.
Bank Rossii set a limit of 10 billion rubles today on so- called currency swaps. The agreements allow traders to bet on the exchange rate without having to sell currency upfront. The bank has restricted them since Oct. 20. The limit was 5 billion rubles yesterday and 10 billion rubles on the previous four days.
The central bank is unlikely to allow a “one-step devaluation” because it wants to avoid “panic among the public an abrupt move might trigger,” Jussi Hahtela, an analyst in Stockholm at Nordea Bank AB, wrote in an e-mail to clients today.
Twelve-month non-deliverable forward contracts, used by traders to speculate on the currency, signal a 27 percent depreciation in the ruble against the dollar, to 35.25. NDFs are contracts used to fix a currency at a particular level at a future date. They are used by companies seeking to protect against foreign-exchange fluctuations.
Russia’s refinancing rate, seen as a ceiling for borrowing money and a benchmark for calculating tax payments, will rise to 13 percent on Dec. 1, from 12 percent. The interest rate for one-day and seven-day loans from the bank in repurchase auctions will be 10 percent, from 9 percent.
Russia’s Micex index of 30 stocks dropped 2.6 percent to 600.70 today, curbing this week’s 16 percent advance.
Last Updated: November 28, 2008 08:35 EST
By Emma O’Brien and Maria Levitov