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    MARKET EDGES

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Russia’s currency shows signs today of stabilization after a week of consecutive drops and a pledge by Bank Rossii Chairman Sergey Ignatiev on January 22 to insure that the Ruble stays within its 41 target level versus a Dollar/Euro basket.

We’ve been following the Ruble’s slide in our playbooks as the slump in oil prices over the past six months has weakened Russia’s energy economy. In trading yesterday the Ruble touched its lowest level against the Dollar at $36.3550, just short of the critical 36.45 per Dollar level to break through its band versus the Dollar/Euro basket.

Russian foreign-currency reserves, the world’s third largest, currently stand at $386.5 Billion from a July high of $462.7Billion, a decline of -16.8%, as the central bank attempts to offset the Ruble’s slide. The question remains: will these measures be enough to right the Russian ship, and equally, what degree of tail risk could be associated with Putin’s attempt at a “gradual and careful” devaluation over the last weeks?

Already the numbers look atrocious: the Russian stock market is down -79.4% from its high on 5/21 last year and down -15.3% YTD. The Ruble has lost -56.2% versus the USD since its low on 7/15/08. Just last week the IMF forecasted Russian GDP at -0.7% for 2009, which we think is too aggressive an estimate.

In this recessed environment a weaker Ruble will encourage exports yet will increase the cost of imports and aggravate domestic inflation. Further, a weaker currency and an unstable market encourages investors to flee to safer investment havens, which has already begun, with withdrawals equaling ~$290 Billion leaving the country already.

Should oil hold around the $40 range, we expect Russia to run a much larger deficit than the IMF prediction. The Ruble’s low against the Dollar and Euro begs the question if Russia will be able to maintain the trading band as the governments hopes for an oil reflation trade. If you’ve read our work hope is not a valid investment process.

Matthew Hedrick
Analyst