Saturday, 29 November 2008

Russians lose confidence in faltering rouble

Financial News

By Jason Corcoran

24 November 2008

Letter from Moscow
Gambling in casinos has been a popular pastime in Moscow since the fall of communism but a more recent fad is desperate speculation on the currency markets. A slide in the value of the rouble and a deposit run at banks that is gathering momentum has loaded the dice in favour of a punt on the dollar.

The on-off love affair with the greenback dates back to 1998 when a rouble devaluation wiped out people’s savings. Those lucky enough to have withdrawn their money in time transferred funds into dollars.

Popular as Russia’s leaders are, its citizens have learnt not to take any chances by keeping faith with the rouble. Russians are rushing to protect their wealth in global currencies, having seen the stock market plunge by 70%, inflation hovering at 15% and all manner of businesses struggling to make basic payments.

Viewers tuning into national television on November 12 may well have been baffled by a
15-second clip announcing the Government’s widening of the rouble’s trading band by 30 kopeks, in a move seen by analysts as a tacit admission of a gradual devaluation.

Russia’s state-run channels have largely ignored the domestic economic crisis by focusing on Wall Street’s woes. President Dmitry Medvedev has gone as far as urging law enforcement agencies to prosecute anyone spreading malicious rumours that could cause the banks to collapse.

Worsening financial conditions, though, are beginning to eclipse an eight-year commodity boom as problems in financial services and real estate contaminate the real economy. Business professionals reading the financial press are better informed, while ordinary people check currency exchanges for the latest rates.

The state is determined to hold the currency stable and the central bank spent $57.5bn in the currency market to shore up the rouble in September and October. However, the rouble has lost 17% of its value over the past two and a half months despite the interventions. Last Thursday, street kiosks were selling dollars at more than 28 roubles apiece, compared with a low of 23 roubles in mid-July.

The faltering rouble is triggering a deposit run, with reports suggesting a deposit loss of 15% in large retail banks such as Alfa Bank, Austria’s Raiffeisen and Italy’s UniCredit.

Smaller banks are even more vulnerable. Authorities last week pledged to protect only national banks with over $4bn in retail deposits or regional institutions with more than $1bn in savers’ deposits.

While the Russian central bank’s move to increase the rouble’s trading band was intended to absorb some of the pressure on the currency, it had the effect of devaluing it by 1% and the stock market responded negatively. The fear is that if the central bank falters in its defence of the rouble, there could be a full-scale run on the banks and the currency.

The oil price is critical for the rouble. Economists believe the only way pressure for a full devaluation will ease is if the price of oil moves much higher than $60 per barrel.

Prime Minister Vladimir Putin and his presidential successor Medvedev remain popular while the Russian population remains apathetic to any alternatives. In an apparent appeal for calm, Medvedev and Putin said recently they would keep their savings in roubles – and in the bank. But further currency fluctuations, along with spiralling inflation and jobs losses may yet bring out protesting pensioners if their mattress money again proves to be good only for kindling fires on harsh winter days.