Outlook: The man who moves markets

GEORGE SOROS surely didn't intend to cause the Russian stock market to close its doors for business with his letter to the Financial Times yesterday warning of financial and economic meltdown in the former Soviet Republic. The trouble is that when someone as high profile in financial markets as Mr Soros makes these doomsday utterances, particularly in a situation as fragile as that faced by Russia, they tend to become self fulfilling.

Anything Mr Soros says or does has to be treated with the utmost suspicion. He seems much to prefer these days the business of travelling the world pontificating on matters of great importance to that of his trade as an international speculator.

Who wouldn't? And because financial markets rule all our lives as never before, everyone takes him very seriously, lapping up his pearls of wisdom.

But it should not be forgotten that though Mr Soros has tended in recent years to take a back seat in his various hedge funds, he is not entirely divorced from them. Very often, he's talking his book.

All that said, we can perhaps give him the benefit of the doubt in this case. Actually Mr Soros has been a heavy investor in rouble assets, and although he's sold down a lot of them in recent months, it can hardly suit his position to plunge the country into further turmoil. Moreover, both his analysis of the situation and his prescriptions for it seem to make a great deal of sense.

By devaluing, the IMF's dollar loans to Russia become worth more and the government would become that much more capable of servicing its rouble debt. As Mr Soros says, the outlook in the absence of such a move looks bleak. Either there is a wide-scale default, which would have catastrophic consequences both for the country and the wider international community, or the government would be forced to print money to pay its debts, leading possibly to hyper-inflation.

More contentious is Mr Soros's suggestion that immediately after the devaluation, the G7 provides Russia with sufficient reserves to start a currency board.

In the past, Mr Soros has been famously opposed to fixed exchange rates, but actually a currency board is a rather different animal to the dollar pegs of the Far East or Europe's exchange rate mechanism. By forcing the authorities to exchange the local currency for dollars, the effect is to apply a rigid and sometimes harsh monetary discipline that automatically guarantees whatever economic medicine the markets require. It worked wonders in Argentina while Hong Kong is a long standing role model for the virtues of the currency board.

The trouble is that Russia is so unstable politically and socially that there's no guarantee of long-term government commitment to such a system. And without that, it would lack international credibility from the start.

Mr Soros's formula for digging Russia out of its economic crisis is not going to be adopted lock stock and barrel, but he's right about the seriousness of the situation and he's made a useful contribution to the debate on how it might be corrected.

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