Russian reserves slump, S&P points to debt rating risk

Russia's currency reserves dropped $32.2 billion in the last two weeks, data on Thursday showed, and a ratings agency warned more falls could be bad news for the country's credit standing as it battles market turmoil. Moscow has committed some of the cash pile it has accumulated from high oil and gas prices to propping up a banking system and currency pummeled by a flight of investors amid the wider global ructions. Reserves are now down $66.9 billion, or 11 percent, since early August, when the military conflict with Georgia accelerated the capital flight and prompted the central bank to step into the market to protect the ruble. Reserves hit a near-six month low of $530.6 billion on October 10, and dealers' estimates of central bank intervention showing most of the latest week's $15.5 billion fall came from the bank selling dollars to aid the ruble. Italian bank UniCredit estimated last week's capital outflows at $13 billion, bringing the total since August 7 to over $66.5 billion. "The key anchor of Russia's rating has always been its buffers, the large reserves," S&P credit analyst Frank Gill said during a conference call. "If we see those continue to hemorrhage, that would be the best forward indicator as to what the rating could do." S&P cut the outlook on its BBB+ rating for Russia to stable from positive last month. As well as currency market interventions, the reserves have been depressed by falling oil and commodity prices -- which lead to lower tax revenues for the resource-focused economy -- and by fluctuations in the euro/dollar exchange rate. Moscow has also committed $50 billion of the reserves for future use in its markets rescue package to help companies refinance foreign debts, plus a further 960 billion rubles ($36.74 billion) for subordinate loans to banks. Gill said S&P was not against Russia using its oil wealth to stave off a crisis in the banking system. "Our bigger concern in Russia is not using these funds necessarily but the administration -- how are they actually going to be distributed," he said. "Will some of that money get lost in the shuffle, will some of it become part of the capital flight? That's our biggest concern, if some of the reserve funds ended up offshore."

 TIME TO SHORT THE ROUBLE?

             On Thursday the ruble traded at 30.40 level against a euro-dollar basket, around the level the central bank has been defending. Russian share indexes lost over 6 percent, falling to levels not seen since mid-2005. "Sharp declines of Russian equity and securities markets on the negative external and domestic newsflow are likely the primary reason for continued capital flight, which is expected to persist in the near future," UniCredit analyst Vladimir Osakovsky said in a note. "The flipside of continued reserve loss is likely increasing focus on whether the CBR will hold the band. One reason against allowing the ruble to weaken, analysts say, is that it could lead to public panic or even bank runs. But some reckon it cannot support the currency forever. "The amount of short term debt due in the two coming quarters will force the CBR to the let the RUB (ruble) go and we will be looking for levels to build a short RUB position against the basket," BNP Paribas said in a research note."

 Reuters
20.10.2008