Last year, the ruble seemed to embody everything that was wrong with the Russian economy ­ it was managed but volatile, and prone to the occasional collapse.

Since last year’s controlled devaluation, the currency had been surprisingly well behaved. In the last two weeks, however, the markets received a reminder of just how fragile the ruble can be ­ and how dramatically it is linked to the price of oil.

The ruble slid more than 4 percent during the week of July 6, lagging an even steeper drop in crude prices. And last week, both the currency and the commodity took a sharp turn up, although not quite recouping their losses.

The wealth of economic news in the last two weeks ­ both positive and negative ­ had a hand in keeping the ruble jumping.

The Central Bank cut its key rates on July 10, a move that many attributed to continued worry on the part of the government about economic growth and the budget deficit. On the same day, however, Finance
Minister Alexei Kudrin said the economy could switch gears and grow 1 percent in 2010.

There was more good news Wednesday, when the Economic Development Ministry said gross domestic product had shrunk by 10.1 percent in the first half, compared with the 10.2 to 10.4 percent previously forecast by the government, and would end the year at minus 8 to 8.5 percent.

The Central Bank did its part in keeping the ruble within bounds, saying Thursday that it spent an $8.4 billion chunk of the country’s roughly $400 billion in foreign reserves to stem the ruble’s decline the previous week.

Analysts, however, said oil, which seemed to find a short-term bottom last week, was what really pulled the ruble back from the edge.

“If you draw a graph of ruble prices in the last few weeks and compare it to oil prices, you’ll see an exact inverse correlation,” said Yevgeny Gavrilenkov, chief economist at Troika Dialog.

Prices for Urals crude ­ Russia’s chief export ­ fell 9.2 percent in the week ending July 10, before gaining back 8 percent in the next five days. The trend was repeated on most global oil markets, with UTI and Brent falling toward $60 but not straying too far past.

The fact that the slide did not go further gave the ruble a bottom as well, Gavrilenkov said.

But oil was not the only factor responsible for the currency’s volatility.

An influx of government budgetary money at the end of June flooded the foreign exchange market with spare rubles, which greased the wheels for a downward move on bad news, Gavrilenkov said.

“As long as there is spare liquidity, the ruble will fluctuate along with oil,” he said.

Gavrilenkov called the Central Bank’s intervention last week a strictly “technical” event, done “just to suppress excessive pressure.” That could change, however, if the price of oil falls further, others warned.

At $40 per barrel, “the Central Bank would be very near a decision point” on whether to support the ruble, said Citibank chief economist Elina Ribakova.

Alfa Bank said last week that the ruble could fall 16 percent by the end of 2009 to a range of 35 to 38 per dollar if the weaker economy makes it “too expensive and harmful” to support. Such a fall could push the ruble beyond the trading band of 26 to 41 against a basket of dollars and euros set by the Central Bank in January.

Other economists questioned the Central Bank’s entire policy of targeting exchange rates. An OECD report issued Wednesday urged Russia to “not resist fundamental pressures for depreciation of the ruble” and switch to a policy of targeting inflation instead.

This will ultimately put the exchange rate in line with “large swings in fundamentals such as oil prices,” the report said.

But the OECD report seemed unlikely to cause a switch in the bank’s policy this late in the game.

“It would be like jumping from one ship to another in the middle of a storm,” said Yevgeny Nadorshin, chief economist at Trust Bank.

A switch away from exchange rate targeting can only come when “derivatives in the local currency market become sophisticated enough to allow participants to adequately hedge their own risk,” rather than having regulators do it for them, Nadorshin said.

“Regulators should be confident, the economy should be ready and expectations should be properly controlled,” he said. “Now is just not the time. It would be too much of a shock to the system.”

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