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Monday, November 10, 2008

Massive Foreign Reserves Outflow Puts Russia's Ruble Trading Band Under Threat

Russia's currency reserves, the third-biggest in the world, are falling steadily as tumbling oil prices and an exodus of capital are piling the pressure on the central bank and government policymakers to accept a devaluation in the ruble. Oil prices which are now down 60% from their july peak, slowing economic growth and increasing investor concern are steadily draining Russia's foreign exchange reserves, which fell 19 percent (to $484.6 billion) in the 12 weeks through Oct. 31. This is down from $598.1 billion in the week before the invasion of Southern Ossetia.

Russia had been using the reserves to try and contain the upward movement in the ruble was thought to present a threat to the competitiveness of exports. But resistance is now becoming increasingly difficult in the fact of a 13 percent drop against the dollar since August 1.

Bank Rossii 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 2.1 percent against the basket to 30.4020. Though the central bank
doesn't reveal the limits of the band, BNP Paribas considers 30.40 to be its
weaker end.
Evidently the main responsibility for the drop in the ruble has been a change in the relative values of the currencies in the basket, with the euro falling significantly against the dollar.

The central bank sold a record $40 billion in October, according to Moscow-based Trust Investment Bank, while Troika Dialog, the country's oldest investment bank, have warned that the currency may fall by as much as 30 percent in the event of a devaluation.

The logic behind any impending devaluation would not be too hard to find either. Try looking at the inflation bonfire which has been allowed to rage in Russia over the last eighteen months.

Inflation Drops Back In October, But Is Still At 14.2%

Russia's inflation rate fell to 14.2 percent, the lowest in seven months, in September as grain, legumes and gasoline prices all decreased. The rate dropped from 15 percent in September, according to data from the Moscow- based Federal Statistics Service. Prices were up 0.9 percent on the month, after rising 0.8 percent in September.

Bank Rossii, Russia's central bank, may have to increase the "flexibility'' of the ruble exchange rate, and this will involve a "certain tendency toward weakening'' according to bank Chairman Sergey Ignatiev speaking on state television Vesti-24 last week.

Russia may "gradually'' widen the trading band if the current account falls into a deficit next year, according to Arkady Dvorkovich, an economic adviser to President Dmitry Medvedev, recently.

And Russia's current account, the widest measure of flows in goods and services, seems now to be inexorably headed toward just thatdeficit. Russia's trade surplus narrowed to $16.4 billion in September, from $18.5 billion in August, according to the latest data from Bank Rossii .

Russia's benchmark 30-year government bond has fallen substantially in 2008, pushing the yield to an almost seven-year high of 12.55 percent as of Oct. 27. So far this year, the RTS Index has lost 64 percent, and is headed for its worst performance since 1998.

And Corporate Lending Piles Up And Up

VTB Group, Russia's second-biggest lender, has lent 377 billion rubles ($14 billion) to Russian companies since the beginning of September. The state-run bank provided 120 billion rubles worth of loans in September, 229 billion rubles in October and 28 billion rubles in the first week of November. Most of the money was leant by VTB (94 billion rubles) to metals companies. This was followed by 33 billion rubles for the power industry and 32 billion rubles for retail companies. The bank increased its corporate loan portfolio to 667 billion rubles in the first 10 months of 2008, from 363 billion rubles in the same period last year, according to the bank. The bank has also increased its retail loan portfolio by 183 billion rubles, a 97 percent increase from the first 10 months of 2007.

Russian Services Contract In October

Russia's service industries contracted in October for the first time in more than seven years as the effects of the financial crisis spread into the real economy. VTB Bank Europe's Purchasing Managers' Index of growth in services fell to 47.4 from 55.5 in September. A figure below 50 shows a contraction.

If we put this chart alongside the October manufacturing PMI one, it is clear that something significant happened in October. If things continue this way we are heading straight for recession I would say.

Update Tuesday 11 November 2008

The ruble fell this morning by the most in at least a month against the central bank's dollar-euro basket and stocks fell back as traders speculate policy makers are allowing the currency to weaken. The Micex Stock Exchange halted trading for an hour after the benchmark index sank almost 10 percent. The Russian currency extended its 16 percent drop since August 1 following the statement by central bank Chairman Sergey Ignatiev (see above) that under current conditions the ruble may have a ``certain tendency toward weakening.''

The ruble declined 1 percent to 30.6879 versus the basket as of 1:30 p.m. in Moscow. Against the dollar, it was at 27.3040 having earlier slid by as much as 1.3 percent to 27.3975. It was 1 percent weaker against the euro at 34.8484 per euro.

In other news Fitch Ratings yesterday followed Standard & Poor's and lowered the outlook for Russia's credit rating to negative, while Bank Rossii today set a limit of 10 billion rubles ($366 million) on the amount of so-called currency swaps it offered. The swaps allow traders to bet on the exchange rate without having to sell rubles. The central bank started curbing swaps on Oct. 20 in theory to deter "speculators".

Among the falling stocks were those of OAO Sberbank, which dropped sharply after Vedomosti reported that Russia's largest savings bank had suffered a record $3 billion of withdrawals from retail accounts in October. Sberbank, which is the biggest holder of ruble deposits, fell 3.2 rubles, or 10 percent, to 27.63 rubles on the Micex Stock Exchange. Retail clients of Russia's biggest bank withdrew 80 billion rubles ($3 billion) in October, a record amount for a single month, Vedomosti reported, citing an unidentified person familiar with the bank's accounts. Central bank Chairman Sergey Ignatiev estimated yesterday said net private capital outflows reached $50 billion in October.

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