08/14/1998 14:21:16 Defending the rouble: Russia's options
By Gill Tudor
LONDON, Aug 14 (Reuters) - With the Russian economy on the
ropes and rumours of a rouble devaluation flying thick and fast,
Russian policy makers face a clamour of conflicting opinions on
how to manage the currency.
A call on Thursday by financier George Soros for Russia to
adopt a currency board system and devalue by 15-25 percent
further turned the screw on the rouble.
But while few other market players agree that a currency
board would ease Moscow's problems, analysts are split between
those who say devaluation has become inevitable and those who
urge Russia to hold steady at all costs.
"It is time to let the rouble go," David McWilliams,
emerging markets analyst at Banque Nationale de Paris in London,
said in a briefing note on Friday.
"The internal arguments against a devaluation in terms of
stability, hyperinflation and banking crises are well founded...
but in the light of interest rates persisting at 150-200
percent, the cost of rouble stability on the economy at the
present exchange rate looks to be simply too high."
Other disagree, saying devaluation is not necessary and
would shatter domestic confidence, the creaking Russian banking
system and any semblance of political stability.
"They have to hold the line," said Tim Ash, an economist at
West Merchant bank in London. "If they devalue they'll set back
reform by at least 10 years."
The rouble is currently allowed to fluctuate in a broad
medium-term trading band of 15 percent above or below a rate of
6.2 to the dollar. The central bank also sets a daily mini-band
edging slowly lower over time to offset inflation, similar to a
The central bank will usually protect the mini-band by
intervening in the market if necessary, although in this week's
turbulent conditions the rouble has spilled outside it. At 1115
GMT on Friday the currency was bid at 6.35 to the dollar, well
outside the day's mini-band of 6.27/6.31.
Russian President Boris Yeltsin insisted once again on
Friday that the rouble would not be devalued and reiterated his
support for reformist Prime Minister Sergei Kiriyenko.
Russia's battered stock market rebounded by 15 percent after
this week's panic-selling, but the local bond and currency
markets remained very choppy, with cripplingly low liquidity.
Analysts say the list of options (both probable and
improbable) facing the government looks something like this:
-- hang on to the status quo and weather the storm, possibly
with the help of more cash from the global community
-- devalue by a set percentage and adjust the trading band
-- devalue by allowing the rouble to float freely
-- devalue and adopt a crawling peg
-- devalue and adopt a currency board
The currency board idea has few takers. A currency board
would fix the rouble to the dollar or euro by at least matching
notes and coins in circulation with hard currency reserves.
But critics say Moscow would not be willing to surrender so
much control over monetary policy, while a currency board could
fuel punitively high interest rates and create opportunities for
both foreign and domestic speculators.
McWilliams argued that one-off "step" devaluations had
failed in emerging markets in recent years, and in their current
mood the financial markets were unlikely to find credibility in
Russian pledges to defend any set parity.
"Our central view is that the rouble will be allowed to fall
to find its own level and that the authorities will opt for a
free-float rather than any other type of target," he said.
Richard Gray, head of emerging markets research at Bank of
America, said he thought the government was more likely to opt
for an inflation-linked system of "sloping bands" akin to a
crawling peg, similar to the way Brazil manages the real.
"I think the rouble will end up lower, but it's likely to
get there through a form of controlled depreciation," he said.
Some proponents of devaluation say letting the rouble tumble
in the short term could lead to medium-term strength.
"If they do devalue sensibly, with a lot of reserves and a
sensible move of 20 to 30 percent, there's no reason why Russia
shouldn't go down and then pop straight up again," said Geoffrey
Dennis, emerging market strategist at Deutsche Morgan Grenfell.
Ash said Russia could still resist devaluation although it
would need extra financing from the international community --
probably over $10 billion -- in addition to the $23 billion
rescue deal agreed in July with the International Monetary Fund.
"If they can get through the next year they're going to
emerge far better positioned, and the Russian economy will be
stronger," Ash said. REUTERS