Re: With Crisis Comes New Devaluation Anxieties

is Putin injecting 5 billUS $ into the Moscow stock market ?



Nov 11, 8:53 am, "captain." <spammersmust...@xxxxxxx> wrote:
With Crisis Comes New Devaluation Anxieties

http://www.sptimes.ru/index.php?action_id=2&story_id=27563

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, analysts suggest.

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.

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 Friday. Goldman Sachs
Group 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 Friday. 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.

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.

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.

"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, 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.

"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.

"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 Friday. "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 on Friday. 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.

Russia's reserves are 25 times bigger today than what they were on the eve
of the default, central bank data shows. 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, 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 Saturday 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.

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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