International Herald Tribune

The Russian central bank devalued the ruble Monday for the second time in a week as signs appeared that despite spending $161 billion defending the currency in recent months, it might be forced to let it fall even further unless oil prices rebounded soon.

The bank is in a delicate balancing act. It is simultaneously trying to encourage trust in the currency while walking it down to a level in line with the reduced earnings from commodity exports. The policy it has chosen is a series of minor devaluations, about once a week.

Thus, companies, banks and ordinary Russians know their money is becoming less valuable. But the central bank is trying to dissuade wholesale conversions to foreign currency by not disclosing the timing and rate of decline.

It is also spending down reserves. The bank spent $17.9 billion defending the ruble in the week that ended on Dec. 5, when it had $437 billion remaining. Still, the ruble has declined 16 percent against the dollar since oil prices peaked last summer.

The creeping devaluation, far from reassuring Russians, has unnerved companies and individuals alike.

Some economists say it might be handled better with a single, sharp step down.

"The bank is devaluing the ruble, and that is inevitable," Anton Struchenevsky, an economist at Troika Dialog bank in Moscow, said in a telephone interview. "But the little steps just provoke people to expect more. They provoke a flight from the ruble. Everybody is using every free ruble to convert into hard currency."

At issue is the steep drop in export earnings that has, by some estimates, swung Russia from enjoying a huge trade surplus, which set off much consumer spending, to a trade deficit. About 80 percent of Russian exports are in oil, natural gas and other commodities.

The central bank supports the ruble against a so-called basket that is 45 percent euros and 55 percent dollars, but the bank has been allowing it to notch down by about 1 percent a week in six devaluations, starting last month.

It announces the devaluations, called a "widening'" of the ruble trading corridor, without specifying the new level of support for the currency against the euro-dollar basket.

Uncertainty about the ruble, meanwhile, is crippling economic activity, Struchenevsky said, as banks and companies profit more surely by changing rubles into dollars, and hoarding dollars, than investing or lending in rubles. As the ruble depreciates a few percentage points a month, holding dollars yields a higher profit in ruble terms than most investments, he said.

Just in November, industrial production fell 8.7 percent compared to the previous year, the Interfax news agency reported Monday, marking the first year-on-year drop in output since April, 1999.

And for all the reserves the bank accumulated in recent years, its job is in many ways far more difficult than that of its European peers, because Russians have learned to expect the worst from their currency over the past decade. In the 1998 financial crisis, for example, the ruble fell 71 percent against the dollar.

http://www.therussiaforum.com/2009/news_16122008.html