/REPEAT//ECONOMY-RUSSIA: Abrupt U-Turn As Russia Allows Devaluation

By IPS Correspondents Reprint | | Print |

Sergei Blagov

MOSCOW, Aug 18 1998 (IPS) - “Now I’m a king,” cheered construction company boss Alexander Sukhanov, brandishing a thick wallet full of hundred-dollar bills. Sukhanov was among the lucky ones who converted his roubles into foreign currency before Monday.

The unlucky ones hesitated and were caught out by an abrupt government U-turn and a de facto devaluation of the Russian rouble sprung on the country that day. The very unlucky, perhaps the majority, had no roubles to spare to start with, let alone dollar s, and are now even worse off than they were before.

On Monday the Russian government and central bank issued a joint statement announcing abrupt changes in monetary policies, including effective devaluation of the rouble, though the word ‘devaluation’ was carefully avoided.

Nevertheless the decree clears the way to up to a 50 percent devaluation of the rouble, just two days after Russian President Boris Yeltsin said there would be no such devaluation — just three days ago. “There will be no devaluation. That is firm and d efinite,” he said during a visit to the northern city of Novgorod in western Russia.

But in the end Yeltsin’s ministers had no choice in the face of the fallout from the unprecedented stock market slide on Aug. 13, blamed by the Kremlin on the ongoing Asian financial crisis and a slump in oil prices that has hard hit one of Russia’s prin cipal exports.

These factors “deprived us from the opportunity to restore confidence in Russian shares, thus causing further decline in the country’s currency reserves,” said a cautiously worded government statement, Monday.

The Russian government and central bank have introduced a new “currency corridor” for the Russian rouble — at between six roubles to the dollar, roughly where it is now, and 9.5 to the dollar – applicable from Monday onwards

Russia’s central bank has repeatedly reaffirmed the rouble would average 6.10 to the dollar during 1998. Last November, it announced the currency would be allowed to fluctuate 15 percent on either side of 6.2 per dollar – at between 5.25 and 7.15 roubles to the dollar – for three years from 1998.

Ironically, at the start of this year it redenominated the rouble, stripping three zeroes off the Russian notes, in a demonstration of confidence that inflation was under control.

The move to widen the fluctuation band has been long awaited, Julia Shvets, an expert with Russian European Centre for Economic Policy, Moscow-based think-tank, told IPS.

“It was better to do it now rather than later,” she said. “And now the central bank no longer has to spend its foreign currency reserves to defend the rouble.”

“The move is designed to defend the interests of Russian citizens and enterprises, rather than currency speculators,” central bank chairman Sergei Dubinin told journalists.

He vowed to end uncontrolled financial speculation and to divert funds into real businesses that employed people.

The Monday statement also introduced a 90-day moratorium on repayment of debt to ‘non-residents’ – mainly Western nations and those foreign investors who had not fled with their capital funds when the crisis broke. The government has vowed to find ways t o halt this kind of capital flight from Russia.

However, many Russians do not share this state-sponsored confidence. Some shops selling high value goods like cars and furniture declined to give prices in roubles, only in dollars.

Many Russians fear a repeat of events of late 1991 and 1992 when skyrocketing inflation — up to 50 percent a day — wiped out the value of their rouble accounts.

On Aug. 13 Russian shares plunged to their lowest levels in more than two years, down to eight percent below the psychologically important 100 mark on the market’s guideline Russian Trading System (RTS) index.

Russia had been breaking records as the world’s fastest rising stock market before the Asian crisis. In March 1996 the RTS 107- share index was peaking at just 67 points, but was topping out at 550 last October. However Russian equities have lost more fou r fifths of their value since then, battered by the volatility in global equity markets since the Asia crisis broke.

“With extremely thin volumes of trade, I’d say the market no longer exists,” said Alfred Kokh, chairman of Montes Auri investment company and former Russia’s privatisation minister.

The Aug. 13 fall, dubbed ‘Black Thursday’ in echo of similar doom laden days on Western stock markets, followed the publication of a letter from investor George Soros to the Financial Times of London. He urged Russia to make a 15 to 20 percent rouble dev aluation. “The meltdown in Russian financial markets has reached the terminal phase,” he wrote.

Soros issued a statement late on Thursday underlining that he sought no personal gain from a fall in the value of the rouble and said the market plunge simply indicated the country’s endemic problems. “The turmoil in Russian financial markets is not due to anything I said or did,” Soros said.

In the wake of Black Thursday, Muscovites staged a run on dollars, leaving many banks unable to cope with the sudden demand. Banks in Russian capital restricted dollar withdrawals and closed down exchange points.

The Central Bank has placed emergency restrictions on the amount of hard currency a bank could buy, and that was reflected at the booths. However, at Sberbank, which runs about four fifths of the Russian main street bank deposit market, bank tellers said that there were no restrictions on dollar withdrawals.

Many Russian analysts say the weak and inexperienced government is to blame. On Mar. 23 Yeltsin sacked his loyal ally Prime Minister Viktor Chernomyrdin, and named the then virtually unknown energy minister Sergei Kiriyenko as premier.

Vitaly Tretyakov, editor of the liberal daily Nezavisimaya Gazeta said in an unusually blunt editorial that the crisis was the result of the “idiotic decision” to appoint Kiriyenko and that “this idiocy is evident now” — adding that former premier C hernomyrdin had done a better job.