• ACI Russia

08/13/1998 15:47:26 Economist Hanke backs Russia currency board idea

WASHINGTON, Aug 13 (Reuters) - U.S. economist Stephen Hanke

on Thursday threw his weight behind new suggestions from

financier George Soros for a currency board in Russia, saying

it was the only way to stabilize the precarious economy.

Hanke, a long-term proponent of the rigid exchange rate

mechanism, said Russia should allow the dollar to circulate in

parallel to the ruble in preparation for the switch.

The authorities should also open the market to foreign

banks and then float the ruble for 30 or 60 days to allow the

market to find a value for the currency, which was quoted at

6.34 to the dollar on Thursday.

"I think it is the only thing that can in fact stabilize

the situation and keep the Yeltsin government in the saddle,"

he told Reuters Television, referring to Russian President

Boris Yeltsin.

A currency board, in use in Argentina, Bulgaria, Hong Kong

and a handful of other countries and territories, pegs the

domestic currency to an outside one and ties cash in

circulation firmly to central bank reserves.

Hanke floated the currency board idea aggressively earlier

this year as a solution to a raft of financial problems in

Indonesia. But both the International Monetary Fund and U.S.

Treasury objected to the proposals.

They said Indonesia banks were too weak to cope with the

tough demands of a currency board and the system would only

provide a brief window of opportunity for those wanting to get

their money out in a hurry.

Dirk Damrau, head of research at MK Renaissance in Moscow,

told the program that a currency board would need structural

reform and fiscal consolidation in Russia, which already faces

huge problems in collecting tax revenue.

"Keep in mind, that's not a solution, that's a mechanism,"

he said. "It sounds nice, but we'd need constitutional change

to make it happen."

Soros, a billionaire financier who is equally well known as

a philanthropist in Russia and eastern Europe, said in a letter

to the Financial Times that a $50 billion currency board backed

by the Group of Seven industrialized countries would be the

only way to end the Russian financial crisis.

He said the ruble should be devalued by 15-25 percent

before the introduction of the system, both to compensate for

lower oil prices and to reduce the volume of reserves needed.

Russia's central bank said the plan would not solve the

crisis, but would create opportunities for speculation.

((Janet Guttsman, Washington newsroom, +1 202 898 8309


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