Ruble and the Dollar

Oil and Gold continue there downward spiral today, dragging commodity based currencies down with them; but none may be more negatively affected then the Russian Ruble. Russia is a major exporter of oil and other commodities and is now entrenched in the worst financial turmoil since its 1998 crisis. Local equity prices have tumbled 70% and investors have pulled billions of dollars out of the country as panic and fear have gripped the nation; over concerns with domestic and political risk, as well as tumbling oil prices.

In Moscow, the dollar-denominated RTS stock index ended down 10.3% on Tuesday after the exchange halted trading for one hour to stem the slide in prices. The RTS stock index has tumbled 68% this year, making it the worst performer among major global emerging market indexes. The Ruble-denominated Micex stock index tumbled 12.6%, leading the Micex exchange to halt trading as well. A broad based retreat in commodity prices sent Russian oil and gas stocks heading lower, which dominate the local market. The RTS Oil and Gas index dropped 11%.



The Russian Federation allowed the Russian Ruble to devalue against there index today, the basket is weighted 55% against the U.S. Dollar and 45% against the EURO; this has sent many Russians into a panic with concerns that the Ruble may in a free fall as this is the first time the Federation has allowed such a move since September, citizens are now scrambling to trade in there Rubles for U.S. Dollars on the fear of a total market collapse. This has sent the Ruble to 30.72 from 30.42, a level at which the central bank had typically defended the Ruble. The policy of holding the ruble within a range against the basket of currencies in order to minimize the appreciation has now shifted to a defensive posture of an overvalued exchange rate as global demand destruction continues to take center stage and squeezes the price of a barrel of crude minimizing net capital flows. The Russian Federations central bank is very reluctant to allow large-step devaluation for fear that it would trigger a wave of capital flight and provoke broader concerns among the population about the country's economic stability. Just Monday the chairman of Russia's central bank, Sergei Ignatiev, commented, "I do not rule out more flexibility in the ruble exchange rate with some tendency towards weakening of the ruble in the current conditions," This may help send the Russian Federation into a deficit in the coming quarters. Given current oil prices, Russia's current account is likely to show a significant shift from the surplus of over 10% GDP during the first quarter of 2008