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Thursday, December 11, 2008

Russian Ruble Devaluation

In Could it Happen to the Russian Bear? I wrote:

“Capital flight is a terrible thing. It happened to Iceland in Iceland Melts, 77% Single Day Drop. In Iceland: What Happens After Imploding? the immediate consequences become apparent. They are not pretty.

Could it happen to the great Russian Bear too?”

Well, it has finally started to happen. Russia is now abandoning the insane defense of the Ruble and letting the currency devalue. Some institutions within Russia are calling for a one time, sudden 20% devaluation over the Christmas holidays when nobody’s watching…

Russians Buy Jewelry, Hoard Dollars as Ruble Plunges (Update1): “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.”

Russia Devaluation Gathers Pace as Central Bank Loosens Control: “Russia devalued the ruble for the fifth time in a month, widening its trading band against the dollar and euro after reserves fell $161 billion as the central bank tried to defend the exchange rate.

Bank Rossii extended the amount the ruble can decline against a target exchange rate to 7.7 percent, from 6.7 percent yesterday and 3.7 percent a month ago. The band was widened on both sides by 30 kopeks today, said a spokesman who declined to be identified on bank policy. The currency weakened 0.7 percent against the basket used to manage its fluctuations.

“They don’t have a choice but to let it weaken and the faster they do it the better,” said Beat Siegenthaler, head of emerging markets strategy in London at TD Securities Ltd. “Regular weekly steps are now the most likely scenario.”

Russia has drained 27 percent of its reserves since the start of August to stymie a 16 percent decline in the ruble versus the dollar as tumbling oil prices, the war in Georgia and the worst global financial crisis since the Great Depression caused investors and locals to remove about $211 billion from the country, BNP Paribas SA data shows.

The world’s biggest energy producer is suffering as the price of Urals crude, its main export blend, has dropped 71 percent from a July record to $40.32 a barrel, below the $70 average required to balance the nation’s 2009 budget.

The ruble fell 4.7 percent against the central bank’s dollar-euro basket in the past month. Goldman Sachs Group Inc. predicts the sliding price of oil will force a ruble drop of as much as 25 percent over the next 12 months. Troika Dialog, Russia’s oldest investment bank, is calling for a one-time, 20 percent devaluation in late January, when there is less risk of bank runs during the New Year’s holidays. UniCredit SpA forecasts a 15 percent decline by end-2009.”


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