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Ruble Drop Forecast by Nomura; Central Bank Sees Gain (Update1)

13 May 2009

Ruble Drop Forecast by Nomura; Central Bank Sees Gain (Update1)

May 13 (Bloomberg) - Nomura Holdings Inc., Barclays Plc and VTB Group say Russia’s ruble will weaken at least 15 percent this year as inflation accelerates and economic growth slows.

Their forecasts defy central bank First Deputy Chairman Alexei Ulyukayev’s prediction yesterday that higher oil prices will spur a 6.4 percent gain in the ruble to 35 against its basket of dollars and euros. The ruble jumped 0.3 percent by 5 p.m. in Moscow today to 37.2319.

“I am definitely a ruble bear,” said Ivan Tchakarov, a London-based economist for Nomura, Japan’s largest investment bank. “It doesn’t make sense for them to have an appreciating currency with growth slowing as it hinders exports and makes imported goods less expensive.” Tchakarov says the central bank may need to let the ruble drop to as weak as 45 should oil prices average $45 a barrel.

Declines in the ruble would end a more than three-month advance that pushed the currency up 13 percent versus the dollar since Jan. 31 as the world’s largest energy exporter benefited from a 34 percent rally in oil prices and the central bank raised interest rates. The shrinking economy and the highest inflation rate in Europe after Ukraine underpin the banks’ predictions.

Barclays says the ruble could weaken as much as 15 percent below current levels against the basket, while VTB, the nation’s second-largest bank, says it may slump as much as 19 percent.

Russia’s economy will probably shrink 6 percent in 2009 after 10 years of expansion, according to the International Monetary Fund and the World Bank. The government’s official forecast for a 2.2 percent contraction will probably be revised down, Ulyukayev said in an interview in Moscow yesterday.

Unsustainable Levels

“The Russian economy just can’t sustain itself with the ruble at current levels,” said Elina Ribakova, chief economist in Moscow at Citigroup Inc. “With oil where it is now the ruble could stay flat but there are still risks to that scenario.”

The ruble rebounded in February after sinking 35 percent against the dollar since August as Russia’s war with neighboring Georgia spurred investors to withdraw funds. By December, oil had plummeted by more than $100 a barrel from a July record as the worst global economic crisis since the Great Depression sapped demand for fuel and ended Russia’s decade of economic growth.

Russia drained more than a third of its foreign-exchange reserves from August to January managing the currency’s decline. Central bank Chairman Sergey Ignatiev pledged Jan. 22 to use more of the now $385.9 billion remaining reserves to stop the currency weakening beyond a level of 41 against the basket unless Urals crude prices dropped to $30 a barrel and remained there.

‘Comfortable Level’

Russia’s main oil export blend has risen to $57.52 a barrel from a low of $32.34 in December.

“I can hardly imagine” the ruble breaking 41 this year, Ulyukayev said yesterday. An average Urals price of $30 a barrel would now be a “comfortable” level for the currency and the Russian economy, he added.

An advance in the ruble to 35 versus the basket would be “quite reasonable,” Ulyukayev said.

Bank Rossii manages the ruble against a basket of about 55 percent dollars and the rest euros to protect exporters.

Nomura’s Tchakarov says policy makers will face pressure to depreciate as a higher exchange rate adds to spiraling wage and materials costs. A “very short-term oil price rally” could bolster the ruble as much as 6.3 percent in the next one to two months, he said.

Rising Prices

While European Central Bank President Jean-Claude Trichet is forecasting negative inflation for the euro region, Russian consumer prices climbed an annual 13.2 percent in April and are likely to accelerate by about 13.7 percent this year, according to Barclays, the third-largest U.K. bank.

To regain its competitiveness as consumer prices rise, Russia may need to let the ruble reach a new “equilibrium” level, according to Elena Loukoianova, an emerging markets analyst at Barclays in London.

Citigroup’s Ribakova and Alfa Bank in Moscow, Russia’s biggest private lender, predict a possible decline of as much as 20 percent versus the basket. Citigroup’s forecast, which is one of a number of scenarios, is based on oil staying around $50 toward the end of the year, with lower revenue forcing Russia to finance a budget deficit above 7 percent of gross domestic product.

‘One-Off Weakening’

A “one-off weakening” of 10 percent against the basket is needed for the central bank to keep inflation from erasing the competitive advantage achieved from last year’s depreciation, Tatiana Orlova, an economist at ING Groep NV in Moscow, said last month. The depreciation is likely to happen around the start of next year, she said.

Concern oil will resume its retreat may trigger renewed ruble weakening beyond the 41 threshold as investors abandon Russian assets again, according to Goldman Sachs Group Inc. Oil prices jumped 11 percent last week to $56.54 a barrel, well above the $41 average predicted by the government for Urals crude this year.

Urals crude near $35 a barrel could trigger a decline in the ruble to as weak as 46 versus the basket, said Ivan Ivanchenko, Moscow-based chief global strategist for the investment banking unit of VTB Group.

“What we’re seeing is a short-term, momentum-driven rally in oil and the central bank is making one big bet on something that is very seasonal, unsure and cyclical,” Ivanchenko said yesterday. “If oil price weakness coincides with more bad economic news, then it could be the start of another August 2008.”

Competitive Edge

Bank Rossii may need to let the ruble drop to as weak as 45 versus the basket by the end of the year should Urals average $45 a barrel, said Tchakarov at Nomura. Should Urals trade at an average $50 to $55 in the year, it may still weaken to 40 versus the basket, he added.

The ruble’s rally “implies a loss of competitiveness at the exact time the economy is laboring under severe stress,” Tchakarov said. “Who really wants this? I don’t think the authorities and the central bank do and I think they are beginning to feel quite uncomfortable about the ruble appreciating so fast.”

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