Russian ruble drops to 6-month low

AP News
Posted: Aug 09, 2011 8:58 AM
Russian ruble drops to 6-month low

The ruble lost more than 3 percent of its value against the dollar, while Russian markets fell in a frantic sell-off on Tuesday triggered by the U.S. debt downgrade and a sharp fall in oil prices.

High oil prices through most of the year helped the government post an unexpected budget surplus, which analysts say could help Russia weather the turmoil as long as it's brief.

The trouble will come if oil prices remain low, making it difficult for the government to meet its social spending obligations ahead of parliamentary and presidential elections.

The Russian currency dropped to a six-month low on Tuesday, shedding more than one ruble, to settle at 29.6 rubles against the U.S. dollar in midday trading.

The ruble lost 2.9 percent against the euro. The rates were even lower at street exchange points.

The benchmark MICEX index was down 1.5 percent to 1,477 points, its lowest point since October of last year, recovering somewhat from a drop of 7 percent earlier in the session. The day before, the MICEX lost 5.5 percent in its biggest drop since 2009.

The U.S. debt downgrade has hit Russian markets particularly hard as it also caused a severe drop in prices for oil, which is the backbone of the Russian economy. Oil prices tumbled to their lowest in nearly a year to below $78 a barrel on Tuesday.

Ivan Tchakarov, chief economist at Moscow-based investment bank Renaissance Capital, said the Russian market right now is governed by "fears and unexplainable psychology."

A slowdown in the U.S. economy could have major repercussions in Russia, Tchakarov warned. Renaissance Capital has calculated that Russia's economic growth would be dented by 2 percent if the U.S. economy dropped by 1 percent.

Strong oil prices this year have helped to prop up a budget that the government had expected to run a deficit. Instead, the government reported a 2.7 percent surplus in January-June. This good performance could provide the necessary buffer, but only if the turmoil is brief, analysts said.

"Unlike the crisis in 2008, Russia does not enter this crisis with a strong fiscal position," Tchakarov said.

Russia was able to afford bailouts and social spending during the 2008 downturn thanks to a huge budget surplus and billions of dollars from a rainy-day fund. The government ran budget deficits in 2009 and 2010 for the first time in a decade.

Shares in other emerging European markets were equally panicky. The WSE index in Poland was down 4.2 percent, the Prague Stock Exchange index in the Czech Republic lost 5.6 percent, and the Budapest Stock Exchange index was down by 4.9 percent.