Dec. 5 (Bloomberg) -- Russia weakened its defense of the ruble for a fourth time in a month, pushing the currency near a three-year low against the dollar, as the price of the nation’s crude oil fell by a record this week to less than $40 a barrel.

The currency slid as much as 1.2 percent to 28.1344 per dollar and dropped 1 percent to 31.5971 against the central bank’s target basket of euros and dollars. “The corridor has been widened,” a Bank Rossii official who declined to be identified said in a phone interview from Moscow today.

Russia, the world’s largest energy producer, raised interest rates twice last month and drained $143 billion from its foreign-currency reserves to arrest a 17 percent drop in the ruble since August as oil plunged. Urals crude, Russia’s main export blend, slumped 20 percent this week to the lowest in almost three years at $39.82 a barrel, below the $70 average needed for Russia to balance its budget next year.

“Given oil is already below $40 a barrel we can’t rule out more depreciation,” said Evgeny Gavrilenkov, chief economist at Troika Dialog in Moscow, Russia’s oldest investment bank. “Any further devaluation depends on oil.”

Russia is facing its worst financial crisis since the government defaulted on $40 billion of debt a decade ago, prompting a 71 percent ruble devaluation against the dollar that eroded bank deposits.

Concern about the currency’s decline spurred Russians in October to withdraw 355 billion rubles ($13 billion) from their deposits, the most in two years, according to central bank data. Foreign-currency deposits rose 11 percent.

Putin’s Pledge

“The gradual approach feeds expectations of further devaluation and prompts the population and companies to convert all extra rubles into foreign exchange,” said Tatiana Orlova, an economist in Moscow for ING Groep NV. “This policy will likely lead to further depletion of foreign exchange and gold reserves.”

Prime Minister Vladimir Putin said yesterday that Russia will avoid “sharp” swings in the ruble by using its $454.9 billion of reserves. The nation’s cash pool rose last week for the first time in two months, the central bank said yesterday.

“We will see more gradual devaluations of around 1 percent at a time,” said Elisabeth Andreew, chief currency strategist at Nordea AB in Copenhagen, Scandinavia’s biggest bank. “We could see the ruble 15 percent weaker against the basket in six months and 20 percent weaker in 12 months.”

‘Perfect Storm’

Any further slide in Urals prices toward a $30-a-barrel average next year may trigger a depreciation of as much as 35 percent versus the basket, said Troika’s Gavrilenkov, who predicts a one-off, 20 percent devaluation in late January.

“It needs to reach an equilibrium level in order to bring the trade surplus and current account back to balanced levels,” Gavrilenkov said. “The sooner they solve these problems the sooner the economy will recover.”

Goldman Sachs Group Inc. economist Rory MacFarquhar in Moscow predicted this week a 25 percent decline against the basket next year as the central bank seeks to preserve its cash reserves as oil prices continue to fall.

OAO Lukoil, Russia’s biggest independent oil producer, and OAO Rosneft, the largest oil company, led a 1.8 percent slump in the Micex index of 30 stocks. Lukoil dropped 3.4 percent to 800 rubles, and Rosneft declined 2.4 percent to 94 rubles.

“Russia is now facing a perfect storm of falling commodity prices, weaker external demand, tighter credit conditions and slower real incomes growth for which no amount of currency adjustment can compensate,” Neil Shearing, an emerging-markets economist at Capital Economics Ltd. in London, said in a research note today.

The central bank manages the ruble against a basket made up of about 55 percent dollars and the rest euros, to protect Russian exporters from its fluctuations. The currency traded at 35.9162 per euro, the lowest since Oct. 3, and was at its weakest against the dollar since February 2006.

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

Last Updated: December 5, 2008 05:29 EST