A sure-fire appreciation bet at the start of this year, the rouble has fallen victim to the collapse in the price of oil and other Russian exports, the global and domestic economic slowdown and the broad-based capital flight from emerging markets.

The central bank has spent over $100 billion defending the currency in the last 4-1/2 months. Faced with shrinking reserves and an economy potentially heading for its first recession in a decade, it started on a gradual depreciation path six weeks ago.

The rouble weakened as much as 1.3 percent on Wednesday, to 33.90 versus a euro-dollar basket RUSMCX. A central bank source confirmed the trading band had been widened.

State-controlled television channels have devoted little air time to the rouble devaluations, central bank officials have kept a low profile and in Moscow protests about the financial crisis have been sparse and badly attended.

However, on Wednesday ex-Soviet leader Mikhail Gorbachev and a government minister separately warned of the dangers of social upheaval sparked by the financial crisis [ID:nLO312348].

The currency is now nearly 16 percent below August’s historic peaks. Oil URL-E, Russia’s main export, has lost 70 percent.

“All the commodity currencies have devalued and the rouble is a laggard here,” said Alexei Moisseev, analyst at Renaissance Capital, estimating that the basket would be fairly valued at around 36 roubles, implying a further 6.5 percent weakening.

“Judging by the pace they are moving at, they could do two more moves before the end of the year. When you are going at such pace, there is a real chance it will help, it is a real alternative to a (big) one-off devaluation.”

Dealers said the central bank had spent no more than $500 million supporting the rouble at the new level on Wednesday.

A Reuters poll this week showed the rouble weakening to 36.24 to the basket by end-2009, while reserves fall a further $100 billion to around $330 billion [ID:nMOS005363], broadly in line with the Economy Ministry’s assumptions.

Apocalypse avoided?

With the controlled devaluations, the central bank hopes to save some of Russia’s reserves and avoid spreading panic among the population while adjusting the exchange rate to reflect low commodity prices and the possibility of an economic recession.

Analysts had criticised the timing and size of devaluations when they started six weeks ago. But the moves have since gathered speed and there are some signs that they are working—in November imports were flat on the year according to Interfax, while the fall in reserves was half that of the previous month.

“For now the apocalyptic scenario and concerns of October and November have not yet come true,” said Yaroslav Lissovolik, chief strategist at Deutsche Bank in Moscow.

“Through gradual and moderate devaluations the central bank bought time...and the situation has somewhat stabilised.”

Faced with a weakening currency and mindful of the 1998 financial crisis and rouble collapse, Russian citizens and companies have started to shift money into dollars or euros.

In a consumer finance piece entitled “Forget about the rouble” one of Russia’s leading business newspapers Vedomosti last week advised on foreign currency accounts.

However, the central bank has been careful to time most of the devaluations with periods of dollar weakness, meaning the brunt of the moves has been borne by the euro/rouble rate—which hit record highs above 40 last week EURRUB.

The more closely watched rouble/dollar RUB has been broadly steady. At 28.70 to the dollar, the rouble is still 10 percent stronger than six years ago, when it sank to 32.

Talking to journalists last month, Russian President Dmitry Medvedev said the currency could weaken to those levels without leading to political problems.

“I am not an economist, and this is my personal view, but I think that the ‘red line’ is somewhere around 31-32 roubles. That is a level which Russians saw relatively recently and which they are ready to accept psychologically,” he said.

Long term analysts say a free float is the best strategy.

“One of the few policy measures that can be undertaken with (Prime Minister Vladimir) Putin still in power is to let the ruble float freely, move to inflation targeting and boost interest rates to positive real interest rates,” economist Andres Aslund wrote in The Moscow Times on Wednesday.