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Bank Rossii Eases Further As Russia's Economy Contracts At A Record Rate

The ECB's Balance Sheet At A Glance.

Thursday, August 28, 2008

Russian Stocks Rebound, Ruble Continues To Fall, and International Reserves Rise Despite Capital Outflows

Russian stocks rose the most in two weeks today as investors bought into an equity market that now has the cheapest valuations in two years. In particular OAO Rosneft, Russia's biggest oil producer, surged as crude oil prices rose for a fourth day. Bank Vozrozhdenie and AFI Development Plc gained after reporting earnings. Crude for October delivery rose as much as $1.74, or 1.5 percent, to $119.89 a barrel in New York as meteorologists forecast Tropical Storm Gustav will be the most damaging since Hurricane Katrina.

The ruble-denominated Micex Index climbed 2.6 percent to 1,337.02 at 4:05 p.m. in Moscow, its biggest gain since Aug. 11. The dollar-denominated RTS Index rose 2.4 percent to 1,626.65, a second day of gains.

The RTS has retreated more than any other major stock market so far this quarter as Russia sent troops into Georgia, falling oil prices weighed on energy stocks and the government probed steel and coal producer OAO Mechel.

The events of July and August pushed the price-to-earnings ratio for the 50-stock RTS to 8.7, the lowest in two years.

Ruble Set For Monthly Decline

The ruble is set for its biggest monthly decline against the dollar-euro basket since its introduction in 2005 as rising tensions with the U.S. and European Union prompt investors to reduce holdings of Russian assets. The currency looks likely to lose around 0.7 percent versus the basket this week. Despite the rise of the last 24 hours Russia's dollar-denominated RTS Index is stilll very near its lowest level in almost two years and the benchmark 30-year government bond slipped for a third day today.

The currency - whose value is controlled by Bank Rossii via what is known as a "managed float" - was at 24.5675 per dollar by 1:26 p.m. in Moscow, from 24.6125 yesterday, when it gained 0.2 percent. The ruble was at 36.3379 per euro, from 36.2475.

Those movements left the currency steady at 29.8540 against the basket, from 29.8483 yesterday. It seems set to lose around 1.8 percent against the basket in August, the biggest monthly fall since the basket was introduced in February 2005. The weighting in the basket is 55% USD and 45% euro.

Capital Outflows Continue

As much as $25 billion in capital has flowed out of Russia since the start of the Georgia crisis, according to BNP Paribas today. However Russia's international reserves, the world's third biggest, rose by $400 million last week according to the latest data from the central bank. Finance Minister Alexei Kudrin told the press on Aug. 17 that investors pulled $7 billion out of the country between Aug. 8-11 alone.

However the value of the reserves of the world's largest energy supplier increased to $581.5 billion in the week ended Aug. 22. The reserves had fallen $16.4 billion in the previous week as the central bank bought rubles to support the currency. Thus there is little likelihood in the short term of the present crisis producing a run on reserves of sufficient magnitude to have any noticeable impact on Russian government policy. The economic issues are likely to arise elsewhere.

UniCredit SpA analyst Vladimir Osakovsky estimates that the central bank spent about $6 billion to support the ruble as a similar amount left the country in the week to Aug. 22, damping the impact of inflows from oil revenue on the reserves. Bank Rossii has yet to release official figures on net capital flows for the period.

The central bank last month started reporting the amount of reserves based on the market value of securities it keeps, rather than on the historical value as was done previously. It has restated the size of the reserves since the beginning of 2008 to bring Russian reporting in line with international standards. The reserves were previously referred to as foreign currency and gold reserves.

Russia's reserves have climbed steadily from their $12.3 billion low in 1998. China has the world's largest currency reserves, which were ruuning at around $1.7 trillion at the end of March, followed by Japan with $970 billion at the end of May.

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