[R-G] Moscow Forced to Shore Up Rouble + Russia Reviews Trade Deals after Conflict

[Yoshie Furuhashi]

<http://www.ft.com/cms/s/0/a56c6662-7ab7-11dd-adbe-000077b07658.html?nclick_check=1>
Moscow forced to shore up rouble

By Charles Clover in Moscow and Peter Garnham in London

Published: September 4 2008 20:37 | Last updated: September 4 2008 20:37

Russia's central bank intervened heavily to support the rouble on
Thursday as analysts said $21bn of foreign capital might have been
pulled out of the country as Moscow paid the price for its conflict
with Georgia.

The rouble fell as low as R30.41, its weakest level since the Russian
central bank adopted its euro/dollar basket in February 2007. The
central bank governor admitted there had been capital outflows since
the war but said the amount was much lower.

The currency intervention was the first since the height of the war
with Georgia at the beginning of August. Before the conflict the
central bank's interventions in the market were aimed at stemming the
rise of the rouble, which it manages to a basket weighted 55 per cent
in dollars and 45 per cent in euros.

The attractions of resource-rich Russia, a net foreign creditor with
sustainable trade and fiscal surpluses and the third-largest foreign
exchange reserves, had made the rouble a one-way upward bet. However,
the rouble has suffered as foreign investors have pulled money out of
Russia.

The outflow of capital from Russia has slowed markedly from its pace
in the middle of August, when capital flight was $21bn in the two
weeks to the end of August 22, according to Goldman Sachs, the
investment bank, and foreign currency reserves fell at their most
precipitous rate since the 1998 currency crisis. Capital outflows in
the week ending August 29 were a much lower $1.7bn, though over the
past two days the value of the rouble against the dollar and euro sank
2 per cent indicating renewed capital flight. To stop the rouble
falling further, the central bank sold $3.5bn-$4bn in reserves,
currency dealers were reporting.

Dealers at MDM Bank in Moscow believe the central bank sold up to
$4.5bn in an effort to halt the rouble's fall, said Mikhail Galkin an
MDM analyst.

The rouble sell off is a sign that in spite of the stabilisation of
the conflict in Georgia, and the absence of tough sanctions on Russia,
investors still perceive political risk. Russia's Rts stock market
index fell 3.94 per cent after dropping 4.25 per cent on Wednesday.

The central bank said that the capital outflow from Russia last month,
when unnerved investors headed for the exits, was $5bn. "According to
very preliminary estimates, the outflow [in August] totalled around
$5bn," said Russian news agencies quoting Sergei Ignatyev, central
bank chairman.

Ivan Tchakarov, a vice-president of emerging markets research at
Lehman Brothers, said: "We find CBR claim that only $5bn has left
Russia in August highly unlikely ... In our view, August capital
outflows may amount to at least $15bn-$20bn."

Russia's central bank still has an impressive war chest to defend its
currency. Its reserves measured in this week at $582bn, the
third-largest foreign currency reserves in the world.

<http://www.ft.com/cms/s/0/0966bc18-79e0-11dd-bb93-000077b07658.html>
Russia reviews trade deals after conflict

By Alan Beattie in London and Luke Peterson in New York

Published: September 3 2008 22:31 | Last updated: September 3 2008 22:31

The collateral damage from Russia's dispute with Georgia over the
breakaway republics of South Ossetia and Abkhazia has spread to
encompass its trading relations with the rest of the world.

In the past week Moscow has announced it will suspend agreements to
import pork and chicken, banned 19 US companies from exporting poultry
to Russia and blocked Turkish trucks at customs posts.

This week it announced it would review its trade agreement with
Ukraine, which allows free passage of most goods into Russia. Moscow
said that Ukraine, having joined the World Trade Organisation this
year, could become a transhipment point for cheap exports from other
WTO member countries to enter Russia. The announcement underlines the
potential for international trade to become embroiled in politics.

Analysts said warnings by the US and others that Russia's actions had
endangered its own application to join the WTO had encouraged a show
of defiance from Moscow. Joe Guinan, a trade analyst at German
Marshall Fund think-tank in Brussels, said: "It is unfortunate the US
approach over Russia's WTO membership has provoked this reaction.
Tit-for-tat trade wars don't help anyone."

Given the global supply shortages of food and oil, two of its biggest
exports, Russia's trading partners have limited scope to punish it
with trade sanctions. Indeed, one of the EU's conditions for Russia to
join the WTO was an agreement not to block its own sales of raw
materials abroad. Mr Guinan said high commodity and energy prices had
strengthened Russia's hand. "Objective circumstances in the global
economy have maximised their leverage," he said.

Russia's dispute with Georgia could also hamper the resolution of
disputes involving companies that have been active in both countries,
which arose after the Mikheil Saakashvili government came to power.

Georgia is locked in a dispute with Itera, a big player in the Russian
natural gas market, which supplied gas to Georgia from 1996 until
2002. In the months before the 2003 rose revolution in Georgia, Itera
says that it struck a gas delivery deal with Georgia's ministry of
energy for $46.4m. Itera claims payments are overdue. However, the
Saakashvili administration disputes the agreement's validity, leading
Itera to sue in a Moscow arbitration court.

In legal papers filed in Florida, where Itera has its headquarters,
Georgia exp­ressed suspicion of the timing of the agreements. It
speculated that Itera and its allies feared a loss of "influence in
Georgian government circles" following any regime change. The ministry
also alleged that the contested agreements "bear certain indicia of
fraud".

As yet, the Moscow arbitration court has not given a ruling. The
proceeding was suspended in 2006 when a Russian travel embargo
prevented Georgian officials from representing themselves in Moscow.
The current hostilities could complicate Georgia's defence.

Itera has also filed an arbitration claim at the World Bank's
International Centre for Settlement of Investment Disputes accusing
Georgia of breaching investment protection treaties with the US and
the Netherlands.