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