• ACI Russia

08/13/1998 14:29:11 Russian economist agrees with Soros on devaluation

By Julie Tolkacheva

MOSCOW, Aug 13 (Reuters) - Russia's most outspoken critic of

the central bank's monetary policies presented the case on

Thursday for a devaluation, saying it would prevent an

Indonesian-style crisis.

Andrei Illarionov, who has been feuding with the central

bank for months over devaluation, told a news conference that he

agreed with a proposal by international financier George Soros

to devalue the rouble and peg it to the dollar or euro.

"If unprecedented measures are not taken in the very near

future, there are serious grounds to expect the course of events

we saw in our recent history and in the recent history of a

southeast Asian country," Illarionov said referring to the

collapse of the Soviet Union and social unrest in Indonesia.

The central bank on Thursday reiterated its official

position that a rouble devaluation would not solve any of

Russia's problems and would only further destabilise markets.

But Illarionov did not agree. "Devaluation will bring rouble

liabilities and hard currency reserves into equilibrium. The

quicker the authorities carry out a devaluation, the quicker the

markets will stabilise."

Soros, in a letter to Thursday's Financial Times newspaper,

said the best solution for Russia would be a "modest" 15-25

percent devaluation and the subsequent introduction of a

currency board, pegging the rouble to the dollar or euro.

"Any man of common sense, not only an economist...would

propose a rouble devaluation to make it a strong currency,"

Illarionov remarked.

He blamed Russia's current financial crisis on unbacked

rouble issuance by the central bank.

"The lack of currency reserves of the country is caused

first of all by mistakes in the central bank's monetary and hard

currency policy in the past year and a half," Illarionov said.

Central Bank Chairman Sergei Dubinin has dismissed

Illarionov's accusations as "lies".

Illarionov, director of Russia's Institute for Economic

Analysis, said foreigners had invested $19 billion in local

government paper in 1997, but the central bank had bought only

$1.8 billion.

At the same time the central bank issued roubles and

rouble-denominated instruments in volumes exceeding dollar

investment in the country, he said, adding that devaluation was

the only economic way out of the present crisis.

He believed the government had only about two weeks to carry

out a relatively painless devaluation.

Russian officials say devaluation would lead to a collapse

in the banking system and trigger inflation. The rouble's

stability and low inflation are seen as the two main

achievements of years of painful reforms.

The banking system is already suffering as a result of

liquidity problems and a crisis of confidence, with some banks

failing to meet obligations to each other and to the central


Russian shares fell sharply on Thursday and short-dated

treasury bill yields soared as banks scrambled for roubles.

The central bank stood firm by the national currency,

prohibiting banks' from buying dollars for their own needs and

expanding their access to overnight credits.

But Illarionov said the measures meant the central bank was

returning to Soviet-style methods of managing the economy.

"This is a return to the command-administrative,

bureaucratic Soviet economy," he said.

((Julie Tolkacheva, Moscow Newsroom, +7095 941-8520


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