MOSCOW, Nov 21 (Reuters) - The Russian rouble is heading for
further devaluation after the central bank spent $58 billion in
two months to support the rouble and Urals crude, its main
export commodity, fell to $45 per barrel
While Russian officials have said there will be no sharp fluctuations in the rouble's exchange rate, analysts say they can no longer ignore macroeconomic fundamentals which suggest that the currency is too strong.
In such an environment the central bank and the government have a limited number of policy options. Three are outlined below, based on interviews with officials, analysts and traders.
GRADUAL DEVALUATION
- The central bank will allow the rouble to devalue in small steps, combining this with a gradual increase in interest rates. It will time the moves to surprise the market.
The central bank may also take advantage of any temporary
dollar weakness or increased demand for roubles, for example to
meet tax payments, to make the moves against the dollar/euro
basket less noticeable to a population which tends to focus on
the dollar/rouble rate
The central bank is running a managed float of the rouble,
keeping it stable against the basket, made of 0.55 dollars and
0.45 euros
Households and firms expect the rouble to weaken more and have been converting their cash holdings into foreign currency. Such actions contributed to capital flight and an ongoing speculative attack on the rouble.
The risk is that the gradual weakening will boost devaluation expectations without a firm guidance on where such devaluation would stop. As such it should be combined with clear communication from the central bank on its policy goals.
The moves could be timed so as to lessen the pain for major Russian firms facing large foreign debt redemptions.
LARGE, ONE-OFF MOVE
- The central bank removes its support for the rouble allowing the market to find a floor. After such a large fall, a partial recovery would be likely to follow.
A one-time large devaluation would be badly received by the public and undermine political stability.
It would contradict public statements by both Prime Minister Vladimir Putin and President Dmitry Medvedev, and could crush fragile public confidence in economic policy.
However, it will bring the desired flexibility to the rouble exchange rate and make currency speculation very much a two-way bet.
The central bank wants to move to an inflation-targeting regime and freely floating exchange rate in the medium term, and has said it will widen the rouble's trading band further as part of the transition.
The bank is also seeking to keep speculators guessing. The fact that major international players are starved of liquidity due to the global crisis has helped the central bank to hold out.
Such a devaluation would benefit Russian exporters but would likely be offset by losses on foreign currency denominated debt payments. Some analysts see this ambiguity as the primary reason for the central bank's lack of action on the exchange rate.
OTHER RULES
- The government may also combine either of the above mentioned scenarios with a clampdown on speculators. A new draft law, currently in the works, will give the central bank sweeping powers to control how the state funds made available to banks and companies is spent.
The government may also introduce some exchange and capital movement controls to hinder currency speculation and capital flight but officials have so far indicated they preferred "softer" forms of control. (Compiled by Gleb Bryanski; editing by Patrick Graham)