(Updates with rate increase)
By Toni Vorobyova and Andrei Ostroukh
MOSCOW, Nov 11 (Reuters) - Russia’s central bank spent an estimated $7 billion on Tuesday on establishing a new limit for the rouble after allowing the currency to weaken beyond a key level it had defended in recent months.
In a separate move, the bank raised all of its official rates by one point, with the exception of a two point rise in the currency swap rate, to prevent flight from rouble positions by companies and the population from rouble deposits.
After breaking through its former 30.41 limit against a euro/dollar basket, the rouble weakened as far as 30.79, according to Reuters data RUS=MCX, and analysts say the move underlines the strain intervention has put on Russia’s currency reserves -- the world’s third biggest.
Some analysts also highlighted the risk that rouble weakness could spread worry among ordinary Russians who remember the country’s 1998 financial crisis.
Russian share prices also fell sharply on Tuesday and the MICEX exchange suspended trading until Thursday.
The rouble closed at 30.70, and the central bank issued a statement saying it had widened the rouble’s trading band by 30 kopecks in each direction “to increase the flexibility of the exchange rate”. Previously the band was seen around 29.25-30.41.
Dealers estimated the central bank had sold $7 billion on Tuesday to defend the new mark -- more than it had spent on interventions in the whole of last week.
“It’s not surprising (that interventions were so high) -- if you start moving the band gradually, you just encourage speculation against the currency,” said David Hauner, emerging market strategist at Bank of America in London.
“The move has now led to an entrenched belief that there will be further moves in the near future.”
Tuesday’s levels were the rouble’s weakest since the basket was set at the current composition of 0.45 euros and 0.55 dollars in February 2007.
Central bank chief Sergei Ignatyev had flagged the move on Monday, saying some rouble weakness was possible [ID:nLA481430].
Russia’s interventions to prop up the rouble from widespread capital flight have helped slice over $100 billion off its gold and forex reserves since early August [ID:nL6346995], taking them below half a trillion dollars.
With falling oil prices depleting the flow of new income to the reserves, experts were increasingly saying compromise on the rouble level was becoming inevitable.
“We have to make the choice: one or the other, and the sooner we decide the better. Otherwise it may turn out as before: no reserves and no strong rouble,” Russian billionaire Mikhail Prokhorov wrote in Vedomosti business daily on Tuesday.
Authorities were reluctant to devalue the rouble during the 1998 financial crisis, but in the end had little choice.
Russia’s bourses [.ME] fell around 10 percent on Tuesday, while 5-year sovereign credit default swaps widened to around 600 basis points RUSSIA5UA=.
Volumes on dollar/rouble trades for tomorrow’s settlement surged to $8.7 billion RUBUTSTN=MCX.
Most analysts had not expected a devaluation so soon -- a Reuters poll at the end of last month had shown the rouble ending this year at 30.40 to the basket, but weakening to 32.20 by the end of 2009 [ID:nMOS005331].
“They are doing the right thing (in allowing the rouble to weaken) because the underlying economics remain -- we sell commodities... international commodity prices have adjusted and we have to adjust,” said Elina Ribakova, chief economist for Russia at Citibank.
“They will do it similarly to the way they were doing the appreciation -- they will take it very gradually. I think it has to go another 15 percent but they could possibly do it during the whole of next year,” she added.
While oil prices have fallen around 60 percent from summer peaks URL-E, the rouble -- even after Tuesday’s devaluation -- has weakened by only around 5 percent over the period, putting pressure on Russia’s resource-dependent economy.
There were no headlines about the rouble depreciation on the Web site of Russia’s main television channel, the state-controlled First Channel, www.1tv.ru.
“We see a danger...that the central bank’s latest move could be seen as premature capitulation by investors, triggering fresh capital flight and necessitating yet more step devaluations in the coming weeks, which could forge a sizeable and resilient vicious circle,” Dresdner Kleinwort said in a note.
The Vedomosti newspaper reported that clients withdrew a monthly record of 80 billion roubles ($2.93 billion) in October from accounts at Sberbank SBER03.MM, Russia’s biggest lender [ID:nLB625715].
“After today’s central bank decision we expect further runs on deposits,” Alfa Bank said in a research note, cutting its 2009 Russian economic growth forecast to 2 percent from 6.
But Citi’s Ribakova said most ordinary Russians do not look at the basket, and have already weathered an 18 percent rally in the more closely watched dollar/rouble rate in three months.
For a FACTBOX on rouble moves see [ID:nLB222365] (Additional reporting by Gleb Bryanski; Writing by Toni Vorobyova; Editing by Ruth Pitchford)