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Rouble teeters on slippery slope

The Russian rouble has stabilized within 1% of 33 to the US dollar over the past 10 days, ever since the rumor started to circulate that the Russian Central Bank would cease its policy of effectively devaluing the currency step by step. That policy had seen the rouble decline by roughly 2% per day over the first eight trading days of the New Year.

This managed devaluation, which actually began in November and had occurred in 21 steps, had seen the rouble steadily lose about a quarter of its value (and nearly a third since August) and made betting against the currency too easy. (See Rouble joins Russia's pointers to decline,4 December 2008.) It also cost the Russian Central Bank more than one third of what had been its record foreign reserves of nearly US$600 billion last August.

The Russian Central Bank was reported to have told leading financial institutions in the country on January 20 that that process was over. Two days later it widened the band within which it would allow the rouble to move against its foreign currency basket benchmark (currently 55% US dollars and 45% euros).

In such a managed float (also called a "dirty float"), the currency market is in general allowed to determine the value of a national currency while the central bank still intervenes to palliate external economic shocks or otherwise alter overall patterns in the fluctuation of the currency's value, rather than trying to influence it on a day-to-day basis. The rouble will now be allowed to float within the relatively wide range of 26 to 41 to the dollar, assuming that the exchange rate of 1.3 dollars to 1 euro and their current balance within the foreign currency basket benchmark remains unchanged.

The rouble will test the 41 level and there is a possibility it could reach as low as 50 against the basket, Elina Ribakova, Citigroup's chief economist in Moscow, said this week, according to a Bloomberg report.

The value of the rouble depends inordinately on the price of oil in the world energy market - Russia is the world's second-largest oil exporter, after only Saudi Arabia. Prime Minister Vladimir Putin has directed the government to review its budget using the valuation of $41 per barrel for the Russian benchmark Urals crude. The price of Urals crude has tumbled about 68% since last July when it stood at a record $142.50 a barrel. It was trading this week at about $44.52 a barrel.

Deputy Prime Minister and Finance Minister Alexei Kudrin insists that the priority must be controlling inflation, and also diminishing the foreseeable government budget deficits.

Reports in the Russian press are beginning to give substance to the notion of an emerging split between Putin and President Dmitry Medvedev. What is important here is, first, the institutionalization of a divergence of interests between their respective staffs and acolytes and, second, the emerging struggle between factions representing interests not only over the implementation (or lack thereof) of anti-crisis measures ordered by the president but over the control and procedures of the security and police structures.

In particular, the first instance of policy conflict between the two factions within the Interior Ministry has emerged over whether to suppress brutally or to permit popular demonstrations against economic hardship. This development promises increasing subterranean political conflict, as the scope for routine political opposition (for example through parliamentary parties as well as the media) has been reduced to extremely narrow dimensions while popular hardship will not soon decrease.

The Russian stock market has stabilized over the past several months, since the rouble's controlled devaluation began. Both the RTS and the MICEX are now in a range between 500 and 700 following a "dead cat bounce" to roughly 900 last November. This means that the former is down nearly 80% and the latter nearly 75% from their May 2008 highs.

Investment advisors in Moscow are even recommending the accumulation of Russian equities, particularly given that by consensus they are now trading at a 3.0 forward-looking price-to-earnings ratio. It is telling, however, that this advice is dispensed with the caveat that what is being awaited is merely a bear market rally.

The low valuations in the Russian equity markets reflect this uncertainty and also the possibility of still further losses as well as the need to weather all those storms before any return can be realized. The current range in the indexes of 500 to 700 is where they both found themselves for some time in 2004-2005 before the spectacular run-up in the worldwide commodity boom that has now burst. Any further important decline would mark the 500 level as a significant resistance to the upside.

It is perhaps wishful thinking, then, on Putin's part to believe that the economy will begin to turn around in the second half of 2009. It may well give the appearance of doing so, but there are signs emerging globally of the danger of a double-dip recession, where that recovery, which would not be limited to Russia, will be interrupted by a renewed crisis. If specialists in Russian equities are looking for a bear market rally, remember that this means that they expect the bear market to continue afterwards. That would not relieve the economic hardship.

Still, a recent poll by the Moscow-based Levada Center reveals that more Russians fear hardship than they do the curtailment of political freedoms. In the absence of either parliamentary or extra-parliamentary means for the expression of political opposition, the fight over Russia's future direction will be fought out in the entrails of the state and para-statal bureaucracy. The floating of the rouble may become a sign of Putin's sinking: the collapse of oil prices may one day be seen as the beginning of post-Putinism. But not for sure, and not quite yet.

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This page contains a single entry from the blog posted on January 29, 2009 12:04 AM.

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