Ruble Set for Largest Monthly Drop

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 is poised to lose 0.7 percent versus the basket this week after Russia reignited concern sparked by its five-day conflict with neighboring Georgia by recognizing the independence of two of the former Soviet republic's separatist regions on Aug. 26. Russia's dollar-denominated RTS Index is near its lowest level in almost two years and the benchmark 30-year government bond slipped for a third day today.

The managed currency 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.

Bank Rossii, Russia's central bank, keeps the ruble within a trading band against the basket to limit the impact of its fluctuations on the competitiveness of local exports.

As much as $25 billion in capital has flowed out of Russia since the start of the Georgia crisis, according to BNP Paribas SA, France's largest bank, in client note e-mailed today.

Russian President Dmitry Medvedev is proposing expanding the six-member Shanghai Cooperation Organization, which includes China, to counter NATO and the west, he said today at a meeting of the alliance in Tajikistan. He is seeking support for his endorsement of the independence of South Ossetia and Abkhazia, a move condemned by the U.S. and some EU states.

A strengthening currency reduces prices on imported goods, helping to curb inflation, which was at 14.7 percent in July, compared with the government's 11.8 percent target. Each 1 percentage point increase in the ruble to the basket reduces inflation by 0.3 percentage point, according to the central bank's own calculations.

Ruble Set for Largest Monthly Drop, Bloomberg
8/28/2008 6:19:09 AM