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Russia's Central Bank Establishing New Floor For Ruble

Russia's Central Bank hopes its moves will also help to control rampant currency speculation in the ruble.
Russia's Central Bank says it is establishing a new floor for the country's currency.

The action is the latest and biggest in a series of 20 mini-devaluations since November that has sought to adjust Russia's currency to lower oil prices and the country's worst economic outlook in a decade.

As the Russian Central Bank announced it will again devalue the ruble today, it also sought to reassure traders this will be the last devaluation for some time to come.

In its statement on January 22, the bank said it will allow the ruble to find a new floor against the euro and dollar up at a point equivalent to 36 rubles to the dollar.

If the ruble devalues beyond that point, the Central Bank will step in to protect it by using its foreign currency reserves to buy up enough rubles to stop the slide.

Controlled Devaluations

Today's devaluation is the latest in a series of 20 controlled devaluations of the ruble since November. And, if the ruble drops fully to the new limit set by the Central Bank, it will be the biggest single devaluation to date -- some 10 percent.

The ongoing devaluation created perfect conditions for currency speculators.
The ruble has already lost about 24 percent of its value since the step-by-step devaluations began.

The Central Bank says this will be the last adjustment of the ruble exchange rate "for the coming months." That suggests that the bank feels that the currency may now have reached a sustainable level amid the global economic crisis.

Sergei Seninsky, economics correspondent for RFE/RL's Russian Service, says the Central Bank's controlled depreciation is a response to two pressures on the ruble.

"On the one hand, oil exports are one of the main sources of revenue for Russia, so when these prices fall, naturally the currency has to react in some fashion," Seninsky says.

"On the other hand, since August of last year, after the military events in Georgia, capital began to flow out of Russia at an extremely fast pace. Foreign investors began to take out their capital," Seninsky says. "So, the step-by-step devaluation was an attempt by Russia's financial authorities -- and above all the Central Bank -- to slow a very rapid fall by the ruble, which would have been unavoidable."

Russian Alarm

Oil prices have dropped from over $140 a barrel in July to just over $40 a barrel today. That has massively undercut Russia's foreign currency earnings, which come mostly from oil and gas exports.

Moscow -- which relies upon energy earnings to fuel growth -- has made no secret of its alarm. Russian Finance Minister Alexei Kudrin warned in October that Russia's 2009 budget would suffer a deficit if oil remains at less than $70 a barrel.

Meanwhile, capital flight hit a record $130 billion last year. It comes both from the exodus of foreign businesses to safer markets and from the long-standing practice of Russian businessmen to protect portions of their wealth by moving it abroad.

Russian deputy economic development minister Andrei Klepach has estimated the economy will contract by 0.2 percent during this year.

As oil prices have remained low for months, Russia has found itself in the additionally difficult situation of having to spend large amounts of its foreign currency reserves to control the ruble's depreciation.

Russia has spent over one-quarter of its foreign exchange reserves -- the world's third largest -- supporting the ruble in recent months, cutting the value of the cash pile to $426.5 billion.

The strategy is to avoid the swift collapse of the ruble that Russia experienced when oil prices slumped in 1998. The ruble's sudden loss of value at that time threw Russian businesses into a tailspin and severely shook ordinary citizens' confidence in the government.

Rampant Speculation

Seninsky says that by announcing today's devaluation will be the last "for the coming months," the Central Bank also hopes to control another perennial risk in times of Russian financial crises: rampant currency speculation by traders.

"The ongoing devaluation created perfect conditions for currency speculators," Seninsky says. "Experts calculated long ago that between the start of November and the middle of January, the interest from hard currency deposits in rubles could earn a return equivalent to 150 percent per year."

That is, if one used rubles to buy dollars in November, one could sell those dollars for one-and-a-half times more rubles today.

Where could the ruble finally stabilize? That is a question no one can answer yet. But Moscow has expressed its hopes.

President Dmitry Medvedev's chief economic adviser, Arkady Dvorkovich, said recently that he believes the ruble could finally stabilize at rate of just over 35 to the dollar.

But the Kremlin doesn't appear confident enough in that forecast to let the ruble float freely.