OK, but what's in it for George?

THE PUBLIC profile of George Soros, billionaire and currency speculator, is such that when he warns that "the meltdown in Russian financial markets has reached the terminal phase", the world sits up and takes notice.

In a letter published in the Financial Times yesterday, Mr Soros said the Russian crisis could be solved if the authorities were to devalue the rouble by 15 to 25 per cent and then peg the beleaguered Russian currency to the euro or the dollar.

So is Mr Soros right? What weight can we put on the arguments of a man unless we know whether he stands to gain were the rouble to fall?

The official Russian reaction to Mr Soros's analysis of their predicament was, unsurprisingly, to rubbish it. The authorities are unlikely to do much else - the surest way to precipitate a devaluation is to hint at currency weakness. Suggestions from any prominent figure that a currency is weak substantially heightens the risk of devaluation.

All of which begins to raise questions. Is Mr Soros simply offering the Russian government a piece of free advice, or has he already placed a bet that the rouble will fall? Or, given the market reaction yesterday, that world stock markets will fall?

Hungarian-born Mr Soros has made his fortune by betting on currency - and occasionally commodity - movements. A well-known philanthropist, he shot to fame in the late 1980s when he bet that the Tokyo market would fall further than New York, a prediction that, eventually, turned out to be true.

Mr Soros, 67, became a household name in the UK in 1992 when he made $1bn (pounds 610m)or so by predicting that sterling would fall out of the ERM. By the 1990s the name Soros only had to be vaguely linked to a currency, or commodity, for there to be a marked market reaction.

Thanks to his mythical status, Mr Soros now - at least in theory - can engineer win-win situations. Bet correctly on a currency, and you are hailed a hero, and this simply adds to your reputation. Bet incorrectly, and let it be known that you believe a currency will fall. This is precisely the reason why the markets greeted Mr Soros's FT letter with such scepticism.

His motives aside, is his analysis of the Russian problem correct? The most immediate problem facing the Russian government is a liquidity crisis. The state has insufficient revenues to service its short-term debt. As Marc Chandler from Deutsche Bank in New York explained, the most recent IMF loan to Russia totalled $4.8bn. Russia needs an estimated $3.3bn to service this month's debt alone, and after that, it needs reserves to prop up its troubled currency.

Russia is caught in a vicious circle - it has insufficient funds, so investors bail out of the country. This puts downward pressure on the rouble - meaning the central bank has to squander valuable resources to defend the currency - and makes it harder for Russia to raise funds by selling long-term bonds.

As Mr Soros suggests in his letter, without drastic measures Russia will print money to service its debt - a move which could lead to hyperinflation - or Russia could default. Mr Soros says either of these options would have "devastating financial and political consequences". Most experts believe he is probably right.

To avoid this, Mr Soros recommends devaluation. But devaluation brings new problems. First, says Stephen Lewis, chief economist at Monument Derivatives in London, many Russian banks have outstanding forward contracts, meaning that they have agreed to buy back dollars at an agreed point in the future at a specified dollar/rouble exchange rate. If there were a devaluation, then the banks would have to lay out proportionately more roubles to meet contractual obligations. So a fall in the rouble may alleviate one type of liquidity crisis, but could well cause another.

Another problem is the effect on confidence, both of residents and of foreign investors. A sharp fall in the rouble would render the savings of many Russians almost worthless in foreign currency terms.

Mr Soros says a modest devaluation should be followed by pegging currency to the euro or dollar. But the problem with this, to borrow a phrase from Margaret1 Thatcher,is that "you can't buck the markets".

Mr Soros's diagnosis of the problem in Russia is undoubtedly correct. His cure is more questionable - most independent experts seem to agree there is no quick fix to Russia's problems, and the long-term solution lies in structural and political reform, not devaluation. And as for Mr Soros's motives - his track record, it is probably fair to say, speaks for itself.

Start your day with The Independent, sign up for daily news emails
England's women celebrate after their 3rd place play-off win against Germany
Women's World CupFara Williams converts penalty to secure victory and bronze medals
Arts and Entertainment
Ricardo by Edward Sutcliffe, 2014
artPortraits of LA cricketers from notorious suburb go on display
newsHillary Clinton comments on viral Humans of New York photo of gay teenager
Arts and Entertainment
The gang rape scene in the Royal Opera’s production of Gioachino Rossini’s Guillaume Tell has caused huge controversy
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

Gaping hole at the heart of the European Union

Treatment of Greece has shown up a lack of genuine legitimacy
Number of young homeless in Britain 'more than three times the official figures'

'Everything changed when I went to the hostel'

Number of young homeless people in Britain is 'more than three times the official figures'
Compton Cricket Club

Compton Cricket Club

Portraits of LA cricketers from notorious suburb to be displayed in London
London now the global money-laundering centre for the drug trade, says crime expert

Wlecome to London, drug money-laundering centre for the world

'Mexico is its heart and London is its head'
The Buddhist temple minutes from Centre Court that helps a winner keep on winning

The Buddhist temple minutes from Centre Court

It helps a winner keep on winning
Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate
Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'