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New Europe Weekly
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The Russian central bank treads a dangerous path
Fri, Nov 28 2008, 16:27 GMT
by New Europe/EMEA Research
Recently there has been a lot of debate in the media about possible rouble devaluation. Anticipation of a weaker rouble is connected to lower oil prices (which is weakening Russia's external balances), worries over Russia's large external debt levels, and greater political risk after the Caucasus crisis.
So far the rouble has been remarkably stable in 2008. Against its dual currency basket (55% USD and 45% EUR) it has only dropped roughly 4.5% this year - see chart one. Further, the rouble has outperformed other commodity currencies since the beginning of August, when commodity prices peaked - see chart two.
However, with oil prices below USD 50 a barrel and Russia's inflation above 14% y/y, we believe the rouble is significantly overvalued at current levels. The Russian authorities know this, which is why the Russian central bank (CBR) on three occasions over the last couple of weeks widened the basket/RUB trading band by 1% each time - de facto devaluations. The latest action was this morning when the basket/RUB went from 31.00 to 31.30.
Meanwhile the CBR this week warned market participants not to speculate on rouble devaluation. More specifically, the CBR urged banks not to increase their foreign currency longs in December, as it hinted that such moves could affect the banks' abilities to participate in the CBR's collateral-free auctions.
In our view, it isn't constructive to try and force market players not to hedge their exposure towards a weaker rouble. Indeed, such a move could easily increase pressure on the rouble, as foreign market participants might view this as a step towards a more protectionist direction, thereby pushing risk premiums up further and generating more distress on Russian financial markets. Instead, we believe it would make sense to move more quickly with the devaluation process in order to remove mounting speculative pressure on the currency, rather than distort market participants' decision making.
Published on Fri, Nov 28 2008, 16:32 GMT
Archive
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