The Russian government created a potential hostage to fortune yesterday by setting an exchange-rate target for the rouble for the first time in the post-Communist period. The Finance Minister, Vladimir Panskov, said the Central Bank intended to limit fluctuation to between 4,300 and 4,900 to the dollar up to 1 October.
The rouble traded in Moscow yesterday at 4,559 to the dollar, only 7.5 per cent above the bottom limit announced by Mr Panskov. It has gained strength since late April, when it hit a low of 5,130, but it is still far below the level of 100 to the dollar at which it traded in early 1992.
The decision to set an exchange-rate target is apparently backed by the International Monetary Fund, which approved a loan of $6.4bn (pounds 4bn) in March on condition the government pursues strict anti-inflationary policies. The measure is also backed by an estimated $10bn in Central Bank reserves, which could be spent in defence of the rouble if there is heavy selling of the Russian currency on the Moscow market.
By setting an exchange-rate target, Moscow is taking a step similar to Britain's 1990 decision to enter the European Union's Exchange Rate Mechanism and peg the pound to the mark. However, the world selling that forced the pound's exit from the ERM in 1992 are unlikely to be matched in Moscow, where daily foreign-exchange business is much less and the rouble should therefore be easier to defend.
In stabilising the exchange rate, Russia's intention is to arm itself with a weapon against inflation, one of the most serious obstacles to successful market-based economic reform. Inflation ran at a monthly rate of 6.7 per cent in June, well below the 17.8 per cent recorded in January but still stubbornly high. "The people in the government are prisoners of their own illusions about the decline of inflation," said Mikhail Zadornov, chairman of the budget committee of the State Duma (lower house of parliament).
The government is being pressed to provide inflation-stoking credits for farmers and state industries. If they go ahead, there will be every incentive for players in the currency markets to switch from roubles to dollars, perhaps sending the rouble crashing below 4,900. A successful defence of the rouble, on the other hand, would come at the cost of keeping the currency at an artificially high rate.