BUSINESS

By Yaroslav Lissovolik

The main revelation in the Russian market this month has been the resurgence of the rouble after the Central Bank completed its step-by-step depreciations of the currency in February.

Last month, after it set the rouble band versus the dollar/euro basket at 26-41, the rouble quickly approached the upper level.

Part of the reason for the rouble's depreciation stemmed from the Central Bank announcing a short-term band of 39-41 roubles versus the basket, which appeared to signal that the risks of rouble appreciation were limited.

This changed, however, in March as the rouble broke through the lower short-term level of 39 versus the basket.

The rouble's recent strength comes from the rise in oil prices, as well as the Central Bank's policy to gradually reduce rouble liquidity injections into the banking sector to narrow the scope for currency conversion. Oil's rise above $50 per barrel effectively allowed the Central Bank to expand the short-term band for the rouble, which given the link between the exchange rate and oil prices would in our view approach 37-41 roubles versus the basket.

Also, the rally in Russian equities is pushing the rouble to appreciate - the correlation between the rouble/dollar rate and the RTS Index in the past six months is close to last year's highs.

We see more room for rouble appreciation from its current 38.95 versus the basket, provided oil prices remain close to current levels in the near term.

The rouble generally appears to have stabilised for now and the pressure on the exchange rate (judging by the size of capital outflows and the contraction of Central Bank reserves) has eased significantly in the past month. The authorities plan to maintain the formal 26 to 41 band over the next several months.

The stabilisation of forex reserves and the rouble's appreciation appear to have strengthened the resolve of the Finance Ministry and the Central Bank not to resort to capital controls.

A stronger rouble is good for Russia's investment case and is certainly instrumental in reversing the massive outflows that have taken place in the past four to five months.

Rouble stability is crucial to channel more financial resources from banks into the real sector, rather than into acquiring dollars on the forex market.

It is also important for Russia's household consumption - and for pushing Russia's financial markets upwards.

Among Russian stocks, Sberbank has been the main beneficiary of rouble strength recently - as of now it has the highest six-month rolling average correlation with the rouble/dollar exchange rate compared with any other stock.

Other key beneficiaries include (in descending order) VTB, Comstar, MTS, CTC Media, VimpelCom and X5. This suggests that across the domestically-oriented sectors, the most sensitive to the rouble's movements versus the dollar are banks, followed by telecoms and then consumer companies.

Finally, in the current context rouble exchange policy is an important component of the authorities' anti-crisis strategy. In this respect, the key statement in the government's recently announced anti-crisis plan is that the rouble band versus the dollar/euro currency basket will be maintained throughout 2009. This suggests that the authorities are unlikely to effect a transition to a free float this year, with the main rationale for the enforcement of the band being to prevent a disorderly depreciation of the rouble that would undermine the public's trust in the currency.

This to some degree suggests that despite the scale of the decline in Russia's manufacturing sector (which generally benefits from rouble weakness), the authorities are also concerned about excesses in rouble depreciation and dollarisation.

At the same time, the rouble's fortunes will closely follow those of oil prices and an expansion in the rouble band is very possible with wider swings in oil prices. If oil prices stay in the $45 to $50 barrel range in 2009, we project the dollar to reach 34.2 by the year's end, with the rouble likely to climb further against the basket.

Yaroslav Lissovolik is chief economist for Deutsche Bank in Moscow.