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UPDATE 1-Russia rouble showdown postponed as currency firms

Published 02/03/2009, 03:45 AM
Updated 02/03/2009, 03:48 AM

(Adds details, background, analyst comments)

MOSCOW, Feb 3 (Reuters) - Profit taking propped Russia's rouble up just a whisker away from the currency's official support level on Tuesday, postponing a widely-anticipated showdown between the central bank and investors.

Russia has spent a third of its reserves, or some $200 billion, ensuring the rouble's depreciation is gradual and the public is protected from a 1998-style currency collapse despite weak oil prices and the worst economic outlook in a decade.

But with the rouble now down by some 28 percent versus a euro-dollar basket since August, the central bank has sought to put a floor under the currency, vowing to defend the 41 level with currency market interventions and interest rate hikes.

The rouble has gradually edged towards that level in recent sessions, closing just half a percent away from it on Monday.

Many had expected a showdown on Tuesday, but instead the rouble was little changed in early trade at 40.80. "People are continuing to take profits ahead of the central bank offer. The central bank has effectively stated that it will fight to the death, will raise interest rates and tighten the screws," said a dealer at a European bank in Moscow.

Dealers said the central bank was not buying roubles, but had placed offers in the market at the 41 level.

The regulator has also used other means to prop up the currency, making it harder for the banking sector to obtain roubles to sell by raising rates on a range of Lombard and repo operations from Monday and gradually reducing the amount of funding it offers.

Reducing rouble liquidity may tempt banks to change their own foreign currency holdings into roubles.

"The battle will take the form of them tightening the screws (on liquidity) and trying to limit the spending of reserves," said Anton Tabakh, analyst at Troika Dialog.

"It's hard to say before the battle has started, but I don't think it will be an easy fight."

Analysts as a whole seem to have some faith in the central bank's ability to win, with a Reuters poll last week showing the rouble at 41.56 to the basket by year-end -- only slightly outside the current band -- and 35.95 per dollar.

Markets are more sceptical however, with non-deliverable forwards (NDFs) showing the rouble at 44 per dollar in 12 months' time.

The weaker rouble and a sharp economic slowdown has forced job and salary cuts, galvanising thousands of Russian opposition supporters to march through key cities on Saturday. (Reporting by Toni Vorobyova; Editing by Ruth Pitchford)

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