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WRAPUP 2-Russian oil falls below $50, Kremlin defends rouble

Published 11/13/2008, 01:00 PM

* Urals crude falls below $50

* Rouble and stocks under pressure

* Kremlin aide says depreciation possible at $30/bbl

* Gold and forex reserves fall $9.2 billion in latest week

* Medvedev says budget not at risk, oil prices set to rise

By Dmitry Zhdannikov and Gleb Bryanski

MOSCOW, Nov 13 (Reuters) - The price of Russian oil fell below $50 per barrel on Thursday for the first time since early 2007, putting further pressure on stocks and the rouble, but the Kremlin pledged to defend the currency until oil falls to $35.

Russia's main crude oil export blend Urals traded at $49.61-$49.31 per barrel at 1700 GMT, down from $50.5-$50.7 on Wednesday.

"If oil price falls to 1998 levels or $8 a barrel, a 20 percent depreciation is possible, but we don't believe it (such oil price fall) is possible," Kremlin's top economy aide Arkady Dvorkovich said in English during a conference call.

"(A price of $30-$35 per barrel) will create fundamentally new environment for monetary policy in Russia and exchange rate will depreciate by a few percentage points. But it will not be a devaluation that some people are talking about," he said.

The budget of the world's second largest oil exporter factored in oil prices at more than $70 per barrel for this year and $95 for next year because of high social spending.

The government says the budget can be sustained on an oil price of $50 next year as it can resort to the use of gold and forex reserves, the world's third largest, of $475 billion.

"A sub-$50 price piles on the pressure against the rouble and encourages speculators to increase bets for further weakening," said Chris Weafer, strategist at Uralsib brokerage.

"The cost of defending the rouble may well become too expensive for the central bank to fight against," he added.

The central bank reported on Thursday a $9.2 billion drop in reserves, which are now down around $120 billion since their August peak, mainly on the back of heavy interventions to support the currency and the euro's drop against the dollar.

Dealers said it spent another $4 billion to support the currency on Thursday alone.

The call on reserves is rising as the government has promised a $200 billion support package to help the economy withstand the global crisis, including some $50 billion from reserves to help domestic firms refinance foreign debts.

The central bank defends the rouble against the dollar-euro basket as it fears a sharp weakening will undermine people's confidence in the financial system, spur a run on deposits and intensify cash outflows. But the drain on reserves has been big.

PANDORA'S BOX

"Many traders take the view that the central bank realistically could not let the level of reserves fall to $400 billion because that would risk the sovereign credit rating and would even more seriously undermine the prospects for the economy in 2009," said Weafer.

Russia still ran a budget surplus of $100.6 billion, or 7.8 percent of gross domestic product, in the first 10 months of the year, fresh Finance Ministry data showed on Thursday.

The Russian rouble hit a fresh 2-1/2 year low of 27.70 to the rallying dollar. It was stable against the dollar/euro basket at 30.66 after the central bank allowed the rouble to weaken by one percent earlier this week.

Most economists slammed the central bank's move, saying it had opened a "Pandora's box" of potential bank runs but Dvorkovich defended the central bank's actions saying he believed "it was not a mistake."

Major international and Russian banks predict the government would have to devalue the rouble by 5-20 percent versus the basket in the next year if oil remains at $50 per barrel.

The Russian stock market, dominated by oil firms, suffered another blow as the benchmark MICEX index closed 8.8 percent down on Thursday after a day-long suspension on Wednesday as it was catching up with heavy losses abroad.

The Russian London-listed shares, which continued to trade on Wednesday, bounced back to close 7.37 percent up.

Russian stocks are now down by more than 75 percent since their May peaks and have shed more than $1 trillion since Dmitry Medvedev became president in May, as investors dump assets on concerns the economy is sliding into its worst crisis in a decade.

Medvedev told French newspaper Le Figaro he was confident the budget was well protected from the oil price slump and that he believed oil prices were poised to rise in the future.

Trading sources said on Thursday the government, seeking to protect budget revenues, had ordered oil firms to resume full exports in November after a cut in loss-making deliveries because of high duties and falling oil prices. (Writing by Dmitry Zhdannikov; editing by James Jukwey)

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