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Russia: Government Moves To Protect Ruble

Moscow, 11 November 1997 (RFE/RL) -- Reacting to persistent jitters on world financial markets, Russia's Central Bank announced Monday it would raise interest rates and alter its ruble policy next year to ward off any speculative attack on the currency.

Central Bank chairman Sergei Dubinin said the temporary interest rate hike, combined with a more flexible exchange-rate policy starting next year, would shore up investor confidence in Russia, following the crisis on world financial markets in the past two weeks.

Dubinin said at a joint news conference with First Deputy Prime Minister Anatoly Chubais that the Central Bank will raise its key refinancing rate, which guides interest rates, to 28 percent from 21 percent starting today. He said the tightening of monetary policy was a temporary move designed to protect the ruble, which has come under pressure recently, due to upheavals on the financial markets.

Dubinin added that the Central Bank's decision to change its ruble policy from 1998 would bolster trust in the currency. Under the new policy, the Central Bank will abandon its ruble corridor from 1998, allowing the currency to fluctuate by 15 percent in either direction of a so-called pivot rate. In 1998, the Central Bank will set that rate at 6.1 rubles to the U.S. dollar, which will inch up to 6.2 rubles to the dollar during 1998-2000.

The new policy coincides with the government's plans to lop three zeroes off the ruble starting January 1, 1998, which will make 1,000 current rubles equal to one new ruble.

Russia has kept to a crawling-peg, exchange-rate policy since 1995, which allowed the ruble to devalue gradually against the dollar, in line with inflation. The government, which has successfully brought down once rampant inflation, is targeting a rate of five-to-seven percent in 1998.

Dubinin said he expected the ruble to devalue between two-to-five percent in 1998, depending on inflation. He tried to dispel fears that the new ruble policy would lead to major fluctuations in the exchange rate, saying the Central Bank's hard currency reserves stood at a healthy $22.6 billion as of November 1.

"No leaps of the currency-exchange rate will be allowed," he said. "Not today, not tomorrow, not on New Year's eve will there be a dramatic devaluation."

But a Central Bank statement acknowledged that the ruble could come under pressure, alluding to similar pressures in other emerging markets such as Brazil and South Korea.

Analysts said the bank's decision essentially to widen the band in which the ruble trades could lead to greater volatility, but that the move to a more flexible exchange rate regime would send the right signal to speculators.

Peter Boone, an economist at Brunswick Capital Management said the wider band means the Central Bank may allow the ruble to depreciate in the case of a speculative attack. But he said given Russia's strong economic fundamentals, the ruble would withstand any such attack and quickly bounce back.

Boone said Russia's decision to adopt a more flexible ruble policy is a response to currency problems in other emerging markets, such as Southeast Asia, where rigid exchange rate regimes have attracted the attention of speculators. As he put it: "It spells the end of very tightly controlled exchange-rate regimes in countries open to foreign capital flows."

In addition to raising the refinancing rate, the Central Bank also said it would raise its Lombard rates, used for lending to commercial banks, and increase the hard currency reserve requirements for commercial banks to nine percent from six percent, effective Wednesday (Nov 12).

The move contradicts the government's previously stated aim of reducing interest rates to free up funds for desperately needed investments in the economy. But Dubinin and Chubais said the temporary interest rate hike was needed to help lure back funds into the government treasury bill market, which has been hard hit by the worldwide flight from emerging market assets.

As Chubais put it: "Russia is not an island cut off from the rest of the world." He said it was a temporary measure designed to shield Russia from the crisis on international financial markets, and would be reassessed once markets stabilize.

Economists applauded the government's decision to raise interest rates, saying it would help stem the flow of funds out of treasury bills. Brigitte Granville, chief Russia economist at J.P. Morgan in London, said a currency crisis might have occurred if the Central Bank had not tightened monetary policy. Foreign investors, who want to leave the treasury bill market, need to sell rubles and buy dollars, putting pressure on the ruble to devalue.

Several emerging market economies, such as Brazil and Ukraine, had raised interest rates, making Russian treasury bills look less attractive to foreign investors. Although the interest rate hike caused treasury bill prices to plummet yesterday, the government hopes the higher yields will tempt investors back, when it issues new bills.