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Ruble may gain as Putin uses oil, gas to lift exports

The ruble rally shows no sign of abating as President Vladimir Putin continues to exploit Europe's dependence on Russian energy with a policy of ever-rising natural-gas prices.

„Russia has a big weapon in the form of energy,” said Lars Rasmussen, an analyst at Danske Bank A/S in Copenhagen who covers the former Soviet states. „They intend to use it to extract higher revenues from their neighbors. This is very positive for the ruble.” The currency may gain about 5% against the dollar this year, according to Goldman Sachs Group Inc., the world's most profitable securities firm. That's on top of a 9.2% advance in 2006, when Russia's trade surplus expanded to a record on surging fuel exports. Russia, the world's biggest energy producer, provides almost half of Germany's natural gas and almost all the gas used by Finland, Greece and Bulgaria and former Soviet states such as Belarus and Lithuania. Russia's plans to charge its neighbors higher gas prices may extend economic growth and boost the ruble even as oil prices decline on world markets. The government forecasts growth of 6.2% in 2007. The ruble traded at 26.23 to the dollar on February 16, a 0.5% gain for the week and just 0.3% short of its more than six-year high of 26.15 set December 4, 2006. It was at 26.22 at 1:30 p.m. in Moscow. Russia limits daily movements of the ruble against a basket of euros and dollars. A 5% increase in the value of the currency this year would take the ruble to its highest since September 1999.

Belarus agreed to pay $100 per 1,000 cubic meters in 2007 for Russian natural gas, more than twice as much as last year, to avert a cutoff in supply. Ukraine will pay a third more, on top of a 100% increase last year. Russia more than tripled its average export price for gas last year to $162.20 per 1,000 cubic meters, from $52.30 in 2005, the federal customs service said February 13. Russian threats to shut down supplies „give a certain cause for concern,” US Defense Secretary Robert Gates said on February 11 in Munich. He made the remarks a day after Putin said the US had „overstepped” its limits in international relations. The government is also increasing control over supplies to western Europe by using its clout with former satellite states to buy stakes in fuel pipelines. OAO Gazprom, the state-run gas export monopoly and the world's largest natural-gas producer, on February 13 said it would buy half of Belarus's national pipeline operator by 2011. The same day Gazprom reported a 68% leap in Q3 sales.

Europe depends on Russia for a quarter of its gas needs and a fifth of those imports pass through Belarus. The reliance is set to grow as Europe's own production drops in places such as the North Sea. „We like the ruble and still think it has a long way to appreciate,” said Michael Ganske, who manages $7 billion of emerging-market debt at Deka Investment GmBH in Frankfurt. „The economy is so rich in oil and gas, and exports such a massive amount, that the outlook is very positive.” The economy grew for an eighth straight year in 2006, the longest run since the fall of the Soviet Union. Oil prices have fallen 25% internationally since reaching a record high in July, and the decline may undermine Russia's efforts to bolster export earnings. Crude oil traded at $59 per barrel at the end of last week. The economy shrank 9.1% in 1998 as the price of oil plummeted below $14 a barrel, slashing state income and forcing the government to default on $40 billion of domestic bonds. Declining fuel prices could hurt the ruble, said Michael Derks, a global strategist at Arch Financial Products Ltd., a London-based hedge fund.

„The ruble will weaken from here,” Derks said. „If the oil price goes to $50 a barrel, it's pretty easy to work out what your view on the ruble is.” Overseas investors drawn to the country's economic growth and its control over the world's largest natural gas reserves, second-largest coal reserves and eighth largest oil reserves now face fewer hurdles. Euroclear, Europe's largest settlement house, said last week it would accept payment in rubles to settle trades. ICAP Plc, the world's biggest inter-dealer broker, said on February 12 it would allow electronic trading in the ruble on the EBS global foreign- exchange platform. Lehman Brothers Holdings Inc. will also set up an index to track average Russian bond prices this year. „This is going to help open up Russia's local-currency debt markets to foreign buyers, as it's much easier now to trade Russian bonds,” said Raphael Marechal, who helps manage $3.2 billion in emerging-market bonds at Fortis Investments in London. „These inflows will feed into further ruble appreciation.” The currency will gain 4% to 5% this year, Marechal said.

The ruble will probably rise to 25.1 against the dollar by year-end, according to Goldman economists Jens Nordvig, Thomas Stolper and Fiona Lake, writing in the firm's February 2007 Global FX Monthly Analyst, published February 6. „Investment has been a weak point in Russia's otherwise impressive economic recovery, so it is welcome to see a rising trend,” the Goldman economists wrote. KfW Group, Europe's biggest corporate bond issuer, and the European Bank for Reconstruction and Development sold the first international bonds denominated in rubles last month. Kfw and the EBRD each sold 2 billion rubles of debt. ZAO Gazprombank also became the first Russian company to issue a ruble bond internationally, saying it anticipated stronger demand after Euroclear's decision. It sold 10 billion rubles of securities. „Russia is becoming more of a developed country rather than an emerging market,” said Nikos Markakis, a currency trader at Global New Europe Fund SA in Athens, which manages $150 million. „The ruble will be supported as it attracts new inflows.” (Bloomberg)