Russia's Massive Foreign Reserves Outflow

Russia's currency reserves, the third-biggest in the world, are falling steadily as tumbling oil prices and an exodus of capital are piling the pressure on the central bank and government policymakers to accept a devaluation in the ruble. Oil prices which are now down 60% from their july peak, slowing economic growth and increasing investor concern are steadily draining Russia's foreign exchange reserves, which fell 19 percent (to $484.6 billion) in the 12 weeks through Oct. 31. This is down from $598.1 billion in the week before the invasion of Southern Ossetia.

Russia had been using the reserves to try and contain the upward movement in the ruble was thought to present a threat to the competitiveness of exports. But resistance is now becoming increasingly difficult in the fact of a 13 percent drop against the dollar since August 1.

Bank Rossii began managing the ruble's exchange rate in February 2005 against a currency basket comprised of about 55 percent dollars and 45 percent euros. Policy makers let it trade within a fixed range in mid-May. Since then, it has dropped 2.1 percent against the basket to 30.4020. Though the central bank doesn't reveal the limits of the band, BNP Paribas considers 30.40 to be its weaker end.

Evidently the main responsibility for the drop in the ruble has been a change in the relative values of the currencies in the basket, with the euro falling significantly against the dollar.

The central bank sold a record $40 billion in October, according to Moscow-based Trust Investment Bank, while Troika Dialog, the country's oldest investment bank, have warned that the currency may fall by as much as 30 percent in the event of a devaluation.

The logic behind any impending devaluation would not be too hard to find either. Try looking at the inflation bonfire which has been allowed to rage in Russia over the last eighteen months.

Inflation Drops Back In October, But Is Still At 14.2%

Russia's inflation rate fell to 14.2 percent, the lowest in seven months, in September as grain, legumes and gasoline prices all decreased. The rate dropped from 15 percent in September, according to data from the Moscow- based Federal Statistics Service. Prices were up 0.9 percent on the month, after rising 0.8 percent in September.

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Bank Rossii, Russia's central bank, may have to increase the "flexibility'' of the ruble exchange rate, and this will involve a "certain tendency toward weakening'' according to bank Chairman Sergey Ignatiev speaking on state television Vesti-24 last week.

Russia may "gradually'' widen the trading band if the current account falls into a deficit next year, according to Arkady Dvorkovich, an economic adviser to President Dmitry Medvedev, recently.

And Russia's current account, the widest measure of flows in goods and services, seems now to be inexorably headed toward just thatdeficit. Russia's trade surplus narrowed to $16.4 billion in September, from $18.5 billion in August, according to the latest data from Bank Rossii.

Russia's benchmark 30-year government bond has fallen substantially in 2008, pushing the yield to an almost seven-year high of 12.55 percent as of Oct. 27. So far this year, the RTS Index has lost 64 percent, and is headed for its worst performance since 1998.

And Corporate Lending Piles Up And Up

VTB Group, Russia's second-biggest lender, has lent 377 billion rubles ($14 billion) to Russian companies since the beginning of September. The state-run bank provided 120 billion rubles worth of loans in September, 229 billion rubles in October and 28 billion rubles in the first week of November. Most of the money was leant by VTB (94 billion rubles) to metals companies. This was followed by 33 billion rubles for the power industry and 32 billion rubles for retail companies. The bank increased its corporate loan portfolio to 667 billion rubles in the first 10 months of 2008, from 363 billion rubles in the same period last year, according to the bank. The bank has also increased its retail loan portfolio by 183 billion rubles, a 97 percent increase from the first 10 months of 2007.

Comments

[Pipo:]

"The former Soviet Union will be split up in even more smaller countries. And with that, there will be some wars."

"In Russia you are lucky if they kill you right away. You are unlucky if they first arrest you, then keep you in prisson for 15 years, torture you and kill you after that".

This is Jim Rogers`s take on Russia.

jimrogers-investments....

2008 Nov 10 06:09 PM

[Steven Hansen:]

"The former Soviet Union will be split up in even more smaller countries. And with that, there will be some wars."

"In Russia you are lucky if they kill you right away. You are unlucky if they first arrest you, then keep you in prisson for 15 years, torture you and kill you after that".

this is thinking like an american looking into russia. if you think this way you will fail in dealing with russia. think like a russian - with pain there is gain. if you are a business or trader - demands will be made of you outside the contract. conversely, you have the right to make demands outside the contract. this is the way friends act towards each other. friendship must be earned. trust comes from friendship.

2008 Nov 10 09:22 PM

[dr.doolittle:]

so does that mean a flood of oil and commodoties on world markets or not? I know I have no plans on moving to Moscow.

2008 Nov 10 09:34 PM

[k9s-4-k8:]

On Nov 10 09:22 PM The hand wrote:


> this is thinking like an american looking into russia. if you think
> this way you will fail in dealing with russia. think like a russian
> - with pain there is gain. if you are a business or trader - demands
> will be made of you outside the contract. conversely, you have the
> right to make demands outside the contract. this is the way friends
> act towards each other. friendship must be earned. trust comes
> from friendship.

This isn't thinking like a Russian. Its more like, if there is pain, I will shoot you in the dead of night and steal your booty.
The naivete of those that deny the existence of the Russian mafia is stifling.
Now, if I am the Russian government, I will arrest you on trumped up charges like income tax evasion, nationalize your company put my cronies in charge and throw you into prison till you grow old and die.
If you are a former KGB agent who speaks ill of Putin and his goons, while living in exile in a foreign capital, I will send my agents to spike your cocktail with Plutonium 210 and deny everything later.

2008 Nov 11 07:00 PM