• ACI Russia

08/13/1998 14:56:05 EMERGING MARKETS-Russian fx board seen unlikely

by James Saft

LONDON, Aug 13 (Reuters) - Russia is unlikely to have the

political will to establish and maintain a currency board and

such a move may be ill-suited to address the rouble crisis,

Western analysts said.

Financier George Soros called on Thursday for a 15-25

percent devaluation of the rouble to be twinned with the

creation of a currency board backed by $50 billion of reserves.

"A currency board in principle is a fine idea but there is

absolutely no chance in practice of it being implemented," said

Charles Blitzer, chief emerging markets economist at Donaldson,

Lufkin & Jenrette in London.

"It is impossible to believe in the Russian government or

the parliament wanting to give up sovereignty over monetary

policy," added Blitzer, who was formerly chief economist at the

World Bank's Moscow office.

A currency board would fix the rouble exchange rate to the

dollar or euro by at least matching notes and coins in

circulation with hard currency reserves, which Soros said would

require additional Western financial support of $15 billion.

But since currency boards pledge to make good local currency

sales at the pre-set level, a drop in demand for the rouble can

only be met with higher interest rates. The market thus

effectively sets interest rates and central bankers are forced

to stand passively by.

Russia's central bank said on Thursday that Soros' plan

would not solve the crisis but would create opportunities for


Mark Cooke, chief investment officer at Brunswick Capital in

London, said he doubts that Russia's economic and market

infrastructure could cope with the strain of a currency board


"I am fairly sceptical," he said. "It would be a fairly

tricky thing to work."

Nick Douch, emerging market currency strategist at Barclays

Capital in London, said that punitively high interest rates

would test Russia's resolve to stick with any currency board.

"The currency board can't change the political will and what

we are all worried about in Russia is the political will," he


He contrasted Russia to Argentina, which instituted a

currency board in 1991 and stuck with it largely due to

steadfast support from President Carlos Menem.

But Stephen Barber, executive director of Pictet Asset

Management in London, said a currency board could work to bring

rates down to an acceptable level.

"It is not a solution to Russia's problems but it may well

be the most effective way to stabilise the situation in the

short term," he said.

"If the rouble is brought down to a level which reflects the

real (dollar) appreciation which has been caused by the fall in

oil prices than it would allow interest rates to fall rapidly."

Soros' comments fuelled a fall in Russian markets that was

already in progress because of a banking liquidity crisis.

Russian shares lost up to 15 percent before settling eight

percent down and yields on short-dated treasury bills soared as

high as 210 percent.

Analysts and fund managers expressed broad agreement that

with or without a currency board devaluation of the rouble was

in the cards but few cared say when or by how much.

"We can all pick numbers out of hats. What we are dealing

with is a total lack of confidence, and in some parts, panic,"

said Cooke.

((James Saft, London newsroom +171 542 2734,


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