Ruble Underperforms Peers in Best Year Since Outbreak of Financial Crisis

The ruble, which capped its best year against the central bank’s target dollar-euro basket since before the credit crisis, underperformed major commodity-linked currencies as lower interest rates and the ouster of Moscow’s mayor eroded demand for Russia’s currency.

The ruble gained 2.3 percent versus the basket used to manage swings that disadvantage exporters this year, the most since 2006 when it added 3.3 percent. The advance was driven by gains against the euro, with the ruble snapping four years of declines against the common currency to strengthen 6.7 percent, the biggest annual advance since at least 2004, according to data compiled by Bloomberg. The ruble weakened 0.9 percent against the dollar in 2010, the third straight yearly drop.

Russia’s currency lagged behind major commodity currencies even amid 14 percent rise in crude oil, which along with natural gas makes up about a quarter of Russia’s economic output. Australia’s dollar surged 13 percent versus the greenback, the South African rand added 11 percent and Brazil’s real strengthened 4.8 percent.

“It’s not a surprise that the ruble strengthened this year given what commodity prices did but the basket move is almost negligible compared to what we saw for the rand and Brazil,” said Bartosz Pawlowski, head of currency and interest rates strategy for central and eastern Europe, the Middle East and Africa at BNP Paribas SA, the second-most accurate forecaster of the dollar-ruble rate on Bloomberg in the third quarter. “Given it is one of the cheapest commodity currencies around, I expect a stronger performance next year.”

Lending Rates

The ruble “underperformed” this year because of Russia’s comparatively lower interest rates and amid local political concerns, Pawlowski said. The dismissal of Moscow mayor Yuri Luzhkov, spurred Russians to convert their holdings, he said.

Russia’s 3.1 percent overnight MosPrime interbank rate compares with Brazil’s 10.66 percent Selic overnight rate making the ruble a less attractive target for the carry trade, Pawlowski said. Russia’s relatively low interest rates compared with other emerging markets ensured it didn’t have to combat inflows like Brazil, which imposed a tax on foreigners’ bond purchases, and South Korea, which started auditing banks’ foreign-currency trading, to limit gains in their currencies.

In carry trades, investors borrow funds in countries with lower rates of interest -- such as the U.S. and Japan where rates are near zero -- and invest them in places where the returns are higher.

Luzhkov Dismissal

President Dmitry Medvedev fired Luzhkov in September after 18 years in office amid allegations he showed favoritism toward his wife in approving contracts. Capital outflows intensified in the second half of the year, with the central bank more than doubling its year-end estimate in November to $22 billion. They totaled between $25 billion and $30 billion this year, Bank Rossii’s First Deputy Chairman Alexei, said yesterday, according to Interfax.

In the last day of official trading on the Micex this year, Russia’s currency weakened 0.3 percent to 30.57 per dollar by the 5 p.m. close in Moscow. It slid versus the euro, tumbling 1.6 percent to 40.70. Those movements left it 0.9 percent weaker at 35.1285 against the basket, which is calculated by multiplying the dollar-ruble rate by 0.55, the euro-ruble rate by 0.45, then adding them together.

Government spending of its ruble-denominated budget funds before the end of the year has spurred the ruble’s slump this week, according to Evgeny Gavrilenkov, chief economist at Troika Dialog in Moscow, Russia’s oldest investment bank.

‘Too Many Rubles’

“Too many rubles came in from the budget in December,” he said. Part of this excess liquidity went into buying foreign currency thus increasing pressure on the ruble, he said.

Bank Rossii buys and sells foreign currency to manage the ruble’s fluctuations and has targeted it against the basket since 2005. The Moscow-based regulator intensified its move toward a free floating exchange rate this year, widening the so- called “floating corridor” it allows the ruble to trade versus the basket and no longer targeting a specific rate of the ruble, according to First Deputy Chairman Alexei Ulyukayev. The corridor may be expanded further in 2011, Chairman Sergey Ignatiev said Dec. 23.

The ruble’s gains this year have been mainly against the euro because Bank Rossii focuses its interventions more on the dollar-ruble rate which is viewed by Russians and the government as “a true reflection of the economy and its stability,” BNP’s Pawlowski said by phone from London today. “The central bank tends to keep the dollar rate capped.”

Ruble Forecast

BNP expects the ruble to appreciate 3.3 percent next year as rising benchmark interest rates make Russian yields more attractive to carry traders and oil prices above $90 a barrel bolster the nation’s current account. It will strengthen to 34 versus the basket by the end of 2011, according to BNP’s Pawlowski.

Traders are pricing in a 0.87 percentage point increase in Russian interest rates in the next three months, according to forward rate agreements, after the central bank raised the deposit rate by 0.25 percentage point to 2.75 percent at its Dec. 24 review. Inflation, which was at an 11-month-high of 8.1 percent in November, will spur Bank Rossii to raise all of its key rates in the first quarter, German Gref, chief executive officer of OAO Sberbank, Russia’s largest lender, told reporters after a meeting in Moscow yesterday.

Bank Rossii and the government agree on the regulator’s management regime for the ruble and both think a free floating currency is ”desirable,” Prime Minister Vladimir Putin said yesterday in Moscow.

Flexible Approach

The central bank’s more flexible approach to the ruble will also bolster it next year, said Troika’s Gavrilenkov, who sees the ruble at about 34.5 versus the basket by the end of March.

Moscow’s Micex exchange, which trades currency, stocks and local bonds, will be closed for the annual New Year holiday break from Dec. 31 to Jan. 10, spokesman Nikita Bekasov said last week.

Russia’s dollar bonds due April 2020 rose for a second day today, pushing the yield down 4 basis points to 5 percent. The yield has dropped 31 basis points since the bond was first issued in April. The yield on government ruble bonds maturing March 2016 rose 9 basis points to 7.64 percent today, and has increased 49 basis points since the debt was first sold in August, according to data compiled by Bloomberg.

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

To contact the editor responsible for this story: Stephen Kirkland at skirkland@bloomberg.net

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