Russia's rouble hit historic lows versus the dollar and the euro on Thursday as the authorities sped ahead with a devaluation of the currency to adjust to lower oil prices and the worst economic outlook in a decade.
The once-buoyant Russian economy is teetering towards recession because of a slump in demand for its energy and commodity exports and flight from emerging markets.
Moscow has been forced to embark on a path of controlled rouble weakening, with the currency losing a fifth of its value versus a euro-dollar basket since August.
Some analysts reckon the rouble may now be nearing its bottom, though they expect several more mini-devaluations in coming days and weeks. Currency markets, however, are betting it will lose another fifth of its value in the next 12 months.
A central bank official confirmed the rouble's trading band had been widened for the fourth time this year on Thursday as the currency slipped to 36.82 versus the basket.
"The main focus is to adjust the rouble to the lower oil price, to balance the balance of payments and to preserve some reserves, which have already fallen significantly," said Yaroslav Lissovolik, chief strategist at Deutsche Bank. "That is the main reason why they are speeding up the weakening of the rouble … It is possible they are hoping to conclude the devaluations this month," he added, forecasting another 7-8 percent weakening versus the basket by end-January.
The rouble has lost more in the first five trading days of 2009 than had been expected for the whole year: a December poll showed it ending 2009 at 36.24 to the basket.
ABOVE THE RED LINE, BUT NEARING BOTTOM?
The rouble weakened past the 32 mark versus the dollar for the first time since Russia began to open its economy to market forces in the 1990s. The dollar rose to 32.35 roubles. The euro hit a record 42.55 roubles.
President Dmitry Medvedev has described 31-32 roubles per dollar as a "red mark" which Russians last saw relatively recently and are thus ready to accept psychologically. Despite the long-term lows, Russia's gold and forex reserves have enabled it to keep the depreciation controlled in contrast to 1998 when the currency slumped 70 percent versus the dollar.
Still, mindful of that time, Russians have been shifting their spare cash into dollars and euros. Capital outflows from the currency hit a record $130 billion last year.
As authorities strove to cushion the exchange rate from capital flight, Russian reserves posted their first yearly fall in a decade to stand at $426.5 billion on Jan. 9.
On Thursday alone the central bank spent $7 billion to $8 billion defending the rouble at the new weaker rate, according to dealers' estimates. That takes estimated interventions for the current week, which started on Sunday, to over $20 billion.
Before the current crisis, Russia had been moving slowly towards a floating rouble exchange for roughly 2011. The latest speeding up of the depreciation process has made some market participants wonder whether a free float could happen sooner.
Trades in rouble/dollar futures on the MICEX exchange topped 9,000 deals on Thursday, a third more than the last record. One-year non-deliverable forwards (NDFs) now show the rouble at around 41.55 to the dollar from 37.34 on Monday.
But analysts are starting to talk of the possibility of rouble bottoming in coming weeks as it gets nearer to reflecting the oil price fall and moves of other commodity currencies.
"If you look at the rouble versus other emerging market currencies which are very much driven by commodities, such as the rand or real, the rouble has done much of what it needs to do already," said David Hauner at Bank of America.
"The correlation between the rouble and oil prices shows that the rouble has now undershot," he added, saying a 1 percent move in oil historically translated into a 0.3 percent move in rouble/dollar.
By that measure, the rouble has already caught up with the 60 percent plus slump in oil prices since August.
Currency depreciation also increases the value of Russia's oil revenues in rouble terms as Moscow braces for the fact that the key export may be worth as little as $32 a barrel this year.
That could lead to a budget deficit of 4 trillion roubles, or some 10 percent of gross domestic product (GDP) assuming a dollar rate of 34 roubles, Interfax reported on Thursday.
A weaker rouble contributed to imports hitting a nine month low in November, ensuring that Russia's dollar trade balance stays in surplus despite sharply falling exports.
