08/14/1998 14:23:40 EMERGING MARKETS FX - Sober amid Russian scare
By Mike Dolan
LONDON, Aug 14 (Reuters) - A Russian devaluation makes
little or no economic or political sense for Moscow, analysts
said on Friday, but if such a move became unavoidable emerging
European markets would only suffer a short-term bout of
An eerie calm descended on Russian and eastern European
markets on Friday as the Russian government insisted its
existing exchange rate policy would remain firm and as markets
took a slighlty more sober assessment of the risk of imminent
"There will be no devaluation -- that's firm and definite,"
Russian President Bosis Yeltsin said, reinforcing a series of
statements from government officials and the central bank.
Although the spot rouble remained outside the Russian
central bank's daily target band on Friday, interest rate and
equity markets recovered some of Thursday's extreme losses and
central and eastern European currencies held steady-to-firmer
The South African rand, Mexican peso and Brazilian real all
held their own during the session.
Emerging Asian currencies were broadly higher, meantime, as
the beleagured Japanese yen regained a more solid footing about
145 per dollar.
Analysts said the Russian financial crisis was likely to be
a protracted one, however, that would continue to discourage
strategic foreign investors for some time.
But they said a rouble devaluation, recommended by fund
manager George Soros on Thursday, would solve none of the
underlying problems facing Russia and may actually exacerbate
Russia runs a trade surplus, for example, and exchange rate
competitiveness is not the issue.
"Devaluation will only create bigger problems. It solves
nothing," said Arnab Das, emerging markets strategist at JP
Morgan in London. "If they devalue, they run the risk of
reducing what little confidence there is in the rouble, creating
a high risk of domestic currency substitution and high inflation
Das said a devaluation would be very difficult to control in
this environment. The political price to pay of an uncontrolled
currency slide, renewed inflationary fears and a
re-dollarisation of the economy could be high ahead of Duma
elections in 1999 and presidential elections in 2000, he said.
"When was the last time you saw a smooth devaluation in an
emerging market with a short-term debt overhang?" he asked.
"We have been arguing for some time that restructuring of
the domestic debt market is the main risk and I think that's the
direction we're headed."
Analysts said the central bank is caught between providing
liquidity to the battered banking system and the currently
conflicting goal of maintaining the exchange rate peg.
In the end, further support from western governments for
Russian foreign exchange reserves may well be needed, combined
with allowing many institutions in the banking system to go to
This would have less of an impact on the real economy than
there was in banking crises in Asia because most of the
instititutions in question are just financial market brokers and
intermediaries, not fully fledged banks.
But even the worse-case scenario in Russia is unlikely to
cause the same sort of financial market waves as the Asian
crisis did last year and will merely prolong the dire investor
sentiment that currently prevails in all high-risk assets,
A further dent to investor confidence world-wide would,
however, have inevitable knock-on effects on markets like South
Africa and Brazil and east Europe. But the economic and trade
linkages between Russia and central and eastern Europe are
nowhere near the interdependence between Asian economies.
Strong underlying economic and financial fundamentals in
countries like Poland would limit any downside. Other countries
with more immediate Russian economic and political links, like
Ukraine and possibly the Baltic nations, may suffer
"I think a Russian collapse would hit the likes of South
Africa and Brazil as a function of its impact on emerging
markets sentiment across the board," said Paul MacNamara,
emerging markets economist at Bank Julius Baer.
"But this would be seen as part of the existing emerging
markets problem rather than some new trigger for yet another
"Everything looks pretty ugly at the moment...but places
like Poland still look less ugly than the rest."
Das at JP Morgan concurred.
"It's important to draw the distinction between a short-term
sell-off and the medium-term outlook," he said. "When the dust
settles, central Europe will come back because the fundamentals
are quite a bit different than in Russia."
Although Thursday's slide did weaken the Czech crown and
Polish zloty a touch, this was a retreat from highs rather than
a plumbing of new lows.
The Czech central bank even managed to slash its discount
rate to 16 percent from 19 percent during Thursday's wobble
without undermining the crown unduly in the process.
Traders said the crown is undergoing a justifiable retreat
that could see it slip further over the next couple of weeks to
support levels about 18.50 per mark from about 18.10 on Friday.