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Russia says mild ruble weakening right decision

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YELENA FABRICHNAYA AND GLEB BRYANSKI

Reuters

November 19, 2008 at 9:31 AM EST

MOSCOW — Russia's central bank admitted on Wednesday it had spent $57.5-billion (U.S.) in two months on supporting the ruble, and Finance Minister Alexei Kudrin said allowing a mild weakening was the right decision in such circumstances.

The ruble has come under heavy pressure as the oil price collapses, investors flee emerging markets and local companies as well as ordinary Russians start to shift some of their money into foreign currencies.

With memories of the 1998 financial crisis and currency collapse still potent, the central bank has ardently defended the ruble against a basket of 0.45 euro and 0.55 U.S. dollar.

With dollars needed to support the currency, and also to fund part of Moscow's $200-billion rescue package for markets and the economy, Russia has been reducing its holdings of some foreign assets.

Central bank governor Sergei Ignatyev said its holdings of U.S. bond agencies' Fannie Mae and Freddie Mac debt had fallen to $20.9-billion on Nov. 1 from $65.6-billion at the start of the year, as maturing paper is not replaced. In mid-September, Russia held around $30-billion in the two agencies.

Latest figures show Russia's reserves, accumulated as oil prices surged to record highs, have fallen to $475-billion since reaching a peak of nearly $600-billion in August.

Analysts were increasingly saying such a drain could not continue and last week the central bank announced a widening of the trading band by 30 kopecks in either direction, resulting in a one per cent depreciation of the ruble.

“We paid for the stability,” Mr. Kudrin told the Duma lower house of parliament on Wednesday.

“The central bank is carrying out a mild widening of the ruble corridor. This is normal, this will allow us to keep the exchange rate stable and to spend less reserves ... I support these moves of the central bank, even though it is independent.”

Economists, who had expected the central bank to start depreciating the ruble next year at the earliest, slammed the timing of the move, saying it threatened to destabilize banks and contradicted the government's official line.

Mr. Kudrin's statement suggested the central bank's action had full government backing. Officials maintain there will be no sharp exchange rate fluctuations.

Since allowing the depreciation, the central bank has defended the ruble at around the 30.70 level, dealers say, though analysts reckon further weakening is likely to follow.

Despite spending reserves on interventions and having already contributed $14 billion to the government's bank bailout program, the central bank seems to have kept the currency structure of reserves broadly unchanged.

Mr. Ignatyev said as of Nov. 1, reserves were 45 per cent held in U.S. dollars, about 44 per cent in euros, “just above” 1 per cent in Japanese yen and 10 per cent in British pounds. The figures are broadly in line with previously aired breakdowns.

Mr. Kudrin said he expected inflationary pressures to subside next year, with inflation rates falling to about 8 per cent and creating room for the central bank to start cutting official interest rates in the second half of 2009.

Mr. Kudrin said he did not see “uncontrolled” risks for the budget coming from some regions where authorities engaged in risky lending schemes. He said the budget will be reviewed in January-February to take into account regional financing needs.

About 18 per cent of Russia's National Wealth Fund has already been invested in domestic stock and bonds, Mr. Kudrin said, adding this reflected changing priorities in Russia's oil wealth management. But his words fell on deaf ears.

“You robbed the country. Billions are gone with the wind. You invested money in the U.S. economy – the main culprit behind the global crisis,” ultra-nationalist deputy Vladimir Zhirinovsky told Mr. Kudrin at the Duma.