Russia rouble plan 'carries little risk'

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The Independent Online
Bankers and economists predicted yesterday that the Russian government would probably succeed in its aim of keeping the rouble within a fixed trading range against the dollar over the next 12 weeks. But they cautioned that the long-term goal of a stable exchange rate remained in doubt because of persistently high inflation and uncertainty over the government's monetary discipline.

The Russian authorities said on Wednesday that they planned to limit the rouble's fluctuation to between 4,300 and 4,900 to the dollar up to 1 October. It was the first time that the government had set an exchange rate target since President Boris Yeltsin launched his ambitious attempt in January 1992 to transform Russia into a market economy.

Foreign exchange dealers in Moscow said the announcement had made little impact on business yesterday because the target seemed well within the government's grasp. The rouble drifted down to 4,576 to the dollar on the Moscow Interbank Currency Exchange (Micex), from 4,559 on Wednesday.

One dealer said the government had taken care to set a target over the summer months, when rouble-dollar trading is likely to be light because of the holidays. "This is like introducing a traffic regulation on a road where there isn't much traffic," Vadim Petrukhin, chief currency trader at Konversbank, said.

The rouble is not freely convertible on world markets and is therefore not subject to the kind of overwhelming international selling pressure that, in 1992, forced the pound and Italian lira out of the European Union's Exchange Rate Mechanism. The volume of Micex business on an ordinary day can be as little as $100m (pounds 60m), a drop in the ocean compared to the scale of transactions in London, New York and Tokyo.

However, the Russian authorities were shaken last October when a wave of speculation swept over the Micex and the rouble lost 20 per cent of its value in one day. The government is confident that nothing like that will happen up to 1 October, not least because the exchange rate target was agreed in consultation with the International Monetary Fund.

"We don't think we are taking a very big risk," said the Economics Minister, Yevgeny Yasin. He and other ministers noted that the rouble had actually risen in value since late April, when it touched an all-time low of 5,130 to the dollar.

Several factors explain the rouble's recent strength. First, the IMF has this year given Russia a $6.4bn loan, which it is releasing in monthly tranches as a reward for strict budgetary discipline. Second, the authorities have introduced a range of high-yield domestic government securities, which have attracted funds out of the dollar.

Third, the Central Bank has learned some of the tricks used by its Western counterparts to protect a currency. It has raised the compulsory reserve requirements of private banks, maintained high interest rates and imposed foreign exchange controls to create a shortage of roubles on the money markets.

If traders attempted to bet against the rouble in the next three months, the Central Bank could resist the assault by spending some of its estimated $10bn in hard currency reserves. But most private bankers said that, even if a rouble crisis happened, it was unlikely to erupt before October.

Perhaps the biggest threat to the rouble is inflation, running at a monthly rate of 6.7 per cent. That is too high for the rouble to stay above 4,900 to the dollar for more than a few months, and so it is likely that the government will announce a revised exchange-rate target after October.

"We are one step closer to financial stabilisation, but the exchange rate is not in line with inflation and that is worrying a lot of people," said Maarten van den Belt, treasurer of ING Bank in Moscow.

The Prime Minister, Viktor Chernomyrdin, has vowed to reduce inflation to 1 per cent a month in the second half of this year, but economists said this was an unrealistic objective. Although the Central Bank's acting governor, Tatyana Paramonova, has kept a generally tight grip on monetary policy this year, earning herself the nickname "the iron lady", there was a sudden increase in the money supply last month.

The farming and state industrial lobbies are also pressing for more government credits, which would push inflation up. The government caved in last year to similar demands, and is under extra pressure this year because Russia will hold parliamentary elections in December.

If the government can resist the temptation to buy votes with cash hand- outs, it will win the prize of a solid platform for healthy economic growth.