Russia let the rouble's value slide again for the sixth time this year on Monday and said it will overhaul the state budget to reflect the sharp fall in the price of oil, its main export. Prime Minister Vladimir Putin, whose high popularity ratings and chances of returning to the Kremlin as President in 2012 hinge on his ability to handle the economic crisis, issued the order to re-work the budget based on less than half the initial oil price estimate. "The Finance Ministry should amend the state budget using the price of oil of $41 per barrel," Putin told the cabinet. The initial budget assumption for oil was $95 per barrel.
Economy Minister Elvira Nabiullina told a cabinet meeting that $41 per barrel oil meant the rouble should average 35.1 per dollar in 2009 provided the U.S. currency trades at $1.4 to the euro. She said inflation will reach 13 percent in 2009.
The rouble fell to 33 per dollar after the cabinet meeting while the RTS stock index extended losses to stand at its lowest levels since August 2004.
Finance Minister Alexei Kudrin, who did not attend the cabinet meeting, said earlier in Hong Kong the oil price may fall below $40 per barrel, suggesting that gloomier forecasts are also under review.
Oil fell more than $1 towards $35 a barrel on Monday on signs of a resolution of a gas row between Russia and Ukraine and after a ceasefire between Israel and Hamas in Gaza eased supply concerns.
Last month Kudrin said the 2009 budget deficit will amount to 5 percent of its gross domestic product based on $50 oil. Russia has stashed $206 billion in rainy day funds, which should enable it to sustain the deficit for some time.
Using this cash to cover the budget deficit will put a further pressure on reserves, already down over a quarter since August, and on the rouble.
With the rouble now trading at 37.81 versus a euro-dollar basket, used by the central bank to guide its exchange rate policy, one-fifth below the pre-devaluation level, analysts are trying to guess how far the central bank still has to go.
SELLING PRESSURE
The new 2009 oil forecast implies the rouble should average 41.4 to the basket, made of 0.55 dollars and 0.45 euros. That assumes another 10 percent devaluation, less than priced in by the market through non-deliverable forward contracts which show the rouble at 42.28 to the dollar a year from now.
The government and the central bank kicked off their gradual devaluation policy in November after spending billions from reserves as they defended the rouble at levels deemed by economists as unsustainable.
Officials say their policy allowed millions of ordinary Russians as well as corporations to shift their roubles into foreign currency without panic — unlike the currency's collapse in Russia's 1998 economic crisis, which caused widespread hardship.
Moscow has accused some banks and corporations of abusing the government's anti-crisis policy as they allegedly used the state cash to bet against the rouble in the forex market, contributing to the selling pressure.
"The fact that selling pressure on the rouble continues despite their efforts to set a more competitive exchange rate for the rouble is a worry for policy makers," said Tim Ash, analyst at RBS.
Officials are now at a crossroads over what to do with the rouble, which has become a safe depreciation bet for speculators. Market sources say exchange controls or a free-float are being considered.
"I think a sharper weakening is unavoidable (in the near future); without that it will be very difficult for the central bank," said a currency dealer at a major European bank.
Kudrin and First Deputy Chairman of the central bank Alexei Ulyukayev are known advocates of the free-float as part of a shift to inflation targeting regime, which, they say, will allow Russia to defeat inflation, expected to hit 13 percent in 2009.
"We believe they should abandon the strategy of gradual depreciation and move to a dirty float to protect the central bank's forex reserves and focus on supporting growth," said Elina Ribakova, analyst at Citibank.
