Jan. 19 (Bloomberg) -- The ruble fell below the weakest level during the 1998 Russian crisis after the central bank devalued the currency for the sixth time in seven days to protect reserves.

The ruble depreciated to 33.1710 per dollar, the lowest since early 1998, before the government’s default on $40 billion of debt helped trigger a financial market collapse. The ruble has lost 7.7 percent since official trading resumed this year, extending the decline to 29 percent since August, 2008.

Prime Minister Vladimir Putin pledged last month to use the nation’s foreign-exchange reserves to avoid “sharp” currency swings. The 71 percent decline against the dollar in 1998 caused investors to flee and savers to pull bank deposits. Investors withdrew $245 billion from Russia since August as a 63 percent drop in oil, Russia’s war with Georgia and the disruption of gas exports to Ukraine and western Europe exacerbated the global financial crisis, according to BNP Paribas SA data.

“Fear of another devaluation means nobody wants to buy rubles right now,” said Lars Rasmussen, an emerging markets analyst in Copenhagen at Danske Bank A/S, which rates itself among the five biggest traders of the ruble through Finnish subsidiary Sampo Bank Plc. “The ruble has begun to look more and more overvalued because of the fall in the oil price.”

Russia’s reserves, the world’s third-largest, dropped by $171.6 billion to $426.5 billion between August and Jan. 9, as policy makers sold foreign currency.

Wider Range

Bank Rossii, which manages the ruble against a basket of about 55 percent dollars and the rest euros, widened its target range today, a bank official said. The currency has fallen 29 percent versus the basket since Aug. 1 and is now able to decline about 22 percent from a target rate, from about 3.6 percent on Nov. 11, the start of the current round of depreciation.

The ruble weakened 1.4 percent to 37.8224 against the dollar-euro basket by 5 p.m. in Moscow, extending this year’s drop to 6.7 percent. It depreciated to 43.8880 per euro, the lowest since the common currency’s introduction in 1999, and has lost 5.7 percent this year.

Today’s record low is reflected on the street, with a median dollar sale price of 33.92 rubles at eight banks and currency kiosks in central Moscow, according to a Bloomberg survey. The range was 33.60 to 34.30.

Danske Bank reduced its forecast for the currency today and expects a further 15 percent depreciation versus the basket to 44.45 in three months, down from a prediction of 38.6 in December.

New Forecast

Mark Mobius said he expects Russia’s currency will begin to stabilize and the central bank may slow devaluations as the ruble approaches fair value. He didn’t say what level that would be.

“It’s not as overvalued as it was,” Mobius, who manages more than $24 billion in emerging-market assets as executive chairman at Templeton Asset Management Ltd., said in an interview today. “I know some commentators think further devaluations can be expected, but I’m not too sure about that.”

Non-deliverable forwards show traders expect an 11 percent decline in the ruble to 37.30 per dollar in the next three months. The forwards fix a currency at a particular level at a future date and are used by companies to protect against foreign-exchange fluctuations.

The pace of devaluations is encouraging investors to place so-called short positions on the ruble-basket rate, wagers on more declines, said Rasmussen of Danske Bank.

Ruble Shorting

The strategy of shorting the ruble has now spread from the major banks to the smaller firms, said Peter Rosenstreich, chief market analyst at Geneva-based currency-trading firm ACM Advanced Currency Markets.

Economy Minister Elvira Nabiullina said the ruble will average 35.1 per dollar this year, 5.7 percent more than its current price, Interfax reported today. Economic growth will probably shrink to 0.3 percent in 2009 as Urals crude, Russia’s main oil blend, averages $41 a barrel, she added, according to the Moscow-based newswire. The ruble fell to the low of the day after the comments were released.

Declining oil revenue contributed to an 8.7 percent contraction in Russian industrial output in November, the most for 10 years. Wage arrears at Moscow-based companies tripled to 213 million rubles ($7 million) in December, according to Rossiiskaya Gazeta, the government’s newspaper of record. Unemployment rose to 6.6 percent last year.

Urals declined 69 percent to $44.43 a barrel from a record in July, below the $70 a barrel needed to balance the budget this year.

‘Gradual’ Devaluation

Policy makers devalued the ruble every trading day last week except for Jan. 13, letting it fall an average 1.7 percent a day versus the basket. That compares with the average two devaluations a week in November and December, at a mean rate of about 0.6 percent a day, according to Bloomberg data.

Bank Rossii First Deputy Chairman Alexei Ulyukayev said last month the bank has a policy of “gradual” devaluation. Declines of as much as 27 percent a day in August 1998 spurred people to withdraw their savings and contributed to the banking crisis.

“They would have been much better off with a large, one- off devaluation this time but their focus is on avoiding panic,” Alexei Moiseev, head of fixed-income research at Moscow investment bank Renaissance Capital.

‘Avoiding Panic’

Bank Rossii increased the pace of the depreciation to minimize the damage from speculators betting on the ruble’s decline, he said. The bank is aiming to complete the devaluation by the end of this month after letting the ruble drop to about 37 per dollar, said Moiseev, who used to work as an economist in the central bank’s capital controls department.

“They’re doing it quicker to avoid the fallout from speculators,” he said. “They’ll keep up this pace until the end of the month and then stop, maybe not every day of the week though because that is too obvious.”

The ruble weakened 5.3 percent against the dollar and 9.8 percent versus the euro last week, the most since 1999. That compares with a record 71 percent slide in the week to Aug. 28, 1998, and a 42 percent slump the week after.

Investors pulled a record $129.9 billion last year. Withdrawals may climb to $160 billion this year should the oil price remain below $40 a barrel, according to Renaissance.

Hoarding Currency

The falling ruble is causing banks, companies and individuals to hoard foreign currency, said Evgeny Nadorshin, senior economist at Moscow’s Trust Investment Bank.

“All the attention of the people is focused on the forex market,” Nadorshin said. “Companies aren’t buying supplies, they’re investing their rubles in dollars instead because the play is too attractive.”

The cost of money is rising as supply tightens and will force policy makers to halt the ruble devaluation “soon,” Nadorshin said. Russia’s MosPrime rate, the average interest- rate banks charge to lend money to each other, rose to a two- month high of 12.5 percent today, according to the central bank.

The ruble will probably weaken to near 40 against the basket before the central bank stops devaluing it some time around the end of January, he said.

The central bank is trying to limit ruble liquidity this week as a way of forcing banks and companies to convert foreign currency into rubles, MDM Bank analysts wrote in an e-mail to clients today. Bank Rossii will auction as little as 80 billion rubles ($2.4 million) in deposit auctions this week, compared with previous offers of as much as 500 billion rubles, the e- mail said.

Russia redenominated the ruble on Jan. 1, 1998, when the 1,000-ruble note became a 1-ruble note.

The market is pricing in an “excessively bearish” view of where the ruble is headed and that is affecting companies with ruble revenues, Rory MacFarquhar, Goldman Sachs Group Inc. Moscow economist said in an e-mail to clients today. Goldman sees the ruble at 35 per dollar in six months time.

To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net

Last Updated: January 19, 2009 10:45 EST