Russian officials dismiss devaluation as ruble falls to two-year low

Graham Stack for business new europe (www.businessneweurope.eu)

Russian Deputy Prime Minister Igor Shuvalov today assured the Financial Times that the government is not intending to devalue the rouble but would use reserves to support the currency. As trading started on Moscow's MICEX, the ruble fell to a two year low against the dollar.

“We don't have any plans for this [devaluation]. We consider that a devaluation would be harmful… We are thinking, 'These are reserves, let us use them as reserves,' the FT quotes Shuvalov as saying.

However, the ruble fell to a two-year low against dollar in the first minute of trading today Wednesday 22 October. The dollar gained 32 kopecks against the ruble, trading at 26.91 rubles, a level not seen since the summer of 2006.

With oil prices falling to under $70 per barrel, rumors of looming devaluation of the ruble started to circulate at the end of last week.

By end of day Friday, October 17, the rate at private exchange bureaus had dropped to 5-7% below the official rate.

Answering such rumours with deeds instead of words, Monday October 20, the CBR first cut the currency swap facility on Friday evening. It placed a limit (50 billion rubles a day, while activity had reached $10 billion) on currency swap, that is, short-term credit using foreign currency as collateral.

As a result, foreign banks were extremely short of rubles, raising domestic interest rates to sky-high levels: overnight rates jumped above 20%, according to Alfa Bank.

On Monday, the CB then appreciated the ruble against the basket by some two kopeks (1%) to stabilize the market.

However this has proved to have been a short lived trend.

According to business daily Kommersant, analysts say that, in the long-term, the ruble will weaken as a consequence of oil prices and the situation on the credit market, and this may even start this week. They expect the ruble to fall about 5 percent.

In comments made to journalists yesterday, October 22, Deputy Prime Minister and Finance Minister Alexei Kudrin said Central Bank's $540bn reserves were sufficient to ensure exchange rate stability.

“The exchange rate will be stable with such a volume of gold and forex reserves,” he said, adding that, “speculators on the currency's exchange rate will be very disappointed,” according to Interfax.