Ruble Devaluation Looms on Oil; Troika Sees 30% Drop

Nov. 10 (Bloomberg) -- Russia's currency reserves, the third-biggest in the world, are no match for tumbling oil prices and an exodus of capital that may force the central bank to accept a devalued ruble.

Just 10 years ago, Russia let the ruble fall as much as 71 percent as the government defaulted on $40 billion of debt and world stock and bond markets collapsed. Now, the combination of a 60 percent drop in oil prices from their peak in July, slowing economic growth and increasing investor concern about emerging markets are draining Russia's foreign reserves, which fell 19 percent to $484.6 billion in the 12 weeks through Oct. 31.

Russia, which uses reserves to curb swings in the ruble that hurt the competitiveness of exports, may find the resistance futile after the currency fell 13 percent against the dollar since Aug. 1. The central bank sold a record $40 billion in October, according to Moscow-based Trust Investment Bank. Troika Dialog, the country's oldest investment bank, said the currency may slump as much as 30 percent in the event of a devaluation.

``When oil falls, capital runs out of Russia and the ruble weakens, it's not justified to hold your positions,'' said Anas El Maizi, who

When Russia defaulted in August 1998, it caused an investor stampede to the safest assets. Yields on 10-year U.S. Treasury notes dropped more than half a percentage point to 4.98 percent that month and the Standard & Poor's 500 Index slumped 15 percent. Hedge fund Long-Term Capital Management LP collapsed after losing about $4 billion, prompting a Federal Reserve- backed bailout by Wall Street. Gross domestic product in Russia shrank 6.5 percent and inflation accelerated to 84 percent.

100 Billionaires
Since then, rising prices of oil, gas and metals such as nickel and aluminum provided Russia with 10 years of economic growth under former President Vladimir Putin and his hand-picked successor, Medvedev. Foreign reserves grew to $598.1 billion in August, the world's biggest behind Japan's and China's, from $18.4 billion just before the 1998 default.

With average economic growth of about 7 percent a year since 1999, rising commodity and stock prices created more than 100 Russian billionaires, including aluminum magnate Oleg Deripaska and soccer club owner Roman Abramovich. In December last year (2007), Time magazine named Putin ``Person of the Year'' for bringing his country ``roaring back to the table of world power.''

Growth Slows

Russia's current account, the widest measure of flows in goods and services, is now headed toward a deficit. Investors pulled about $147 billion out of the country in the past three months, according to BNP Paribas SA, sending the dollar- denominated RTS Index of stocks down 52 percent.


`You can't stimulate a slowing economy by keeping the currency fixed,'' said Lars Christensen, head of emerging- markets currency strategy in Copenhagen at Danske Bank A/S. ``They will have to change their attitude to using reserves for the sake of the economy.''

Russia's reserves are 25 times bigger today than on the eve of the default, central bank data show. The world's biggest energy exporter, Russia still earns $700 million a day from oil, compared with $100 million 10 years ago, according to Chris Weafer, chief str