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Russia: Central Bank Devalues Ruble

Prague, 17 August 1998 (RFE/RL) -- The Russian authorities are gambling for very high stakes with the announcement Monday (Aug. 17) of sweeping new measures to stabilize the country's deteriorating financial position.

If the gamble succeeds, Moscow will have won breathing space in which to start bringing order to its economy. If it fails, the consequences will certainly be severe in economic terms, with unpredictable results in the political and social spheres.

The key step in the new package is the de facto devaluation of the ruble. This has been achieved by widening by some 50 percent the corridor within which the Central Bank will support the currency. The ruble will be now allowed to sink as low as 9.5 to the dollar before Central Bank intervention. This amounts to an admission that in the face of massive market pessimism, Russia cannot defend the ruble's present value.

Money markets so far have reacted mildly. The ruble has declined, but selling pressure has not been so great as to cause it to sink to the danger level. Analysts say however that if a big slide develops, the Central Bank's main problem will be to keep it under control. Although the bank reputedly has over $17.5 billion in reserves to support the ruble, about one-third of this is in gold, not cash, therefore reducing the liquid resources which can be brought into play at any given moment.

The people of Moscow are providing a barometer of popular feeling about where the ruble is heading. Almost immediately after the government announced the emergency measures, Muscovites were thronging banks and exchange offices seeking to buy dollars to replace their rubles.

An uncontrolled fall of the ruble would have negative effects throughout Russia's real economy. Sheetal Radia, a senior economist with the MMS International finance house in London, explains:

"You would be looking at inflation, and interest rates would have to go even higher than they are now. The fiscal side might have to be a lot tighter then maybe even then the level desired by the International Monetary Fund. That would bear down heavily on the Russian man in the street, who unfortunately is going through a tough time anyway."

Radia says that the likely outcome of all the troubles is a contraction of Russia's gross domestic product by more than 4 percent this year. He says much depends on how quickly the Russian government can get its tax collection methods in order, so as to raise revenues and keep the system functioning.

"The main problem with Russia all along has been the fact that it relies internally on short-term financing, and it has got to the stage now that it cannot access that short term financing, because rates are too high and no one outside Russia, no foreign investor, will lend it any money."

Within hours of the events in Moscow, the International Monetary Fund's Managing Director, Michel Camdessus, said the Russian measures and their potential impact will immediately be analyzed by the staff and management of the IMF.

German Chancellor Helmut Kohl also was supportive, saying that he felt the situation is repairable if the right decisions are taken. Apart from the de facto devaluation, the new Russian measures include a 90-day moratorium on foreign debt repayments, the suspension of all further auctions of domestic debt instruments, and the restructuring of the debt into new bonds. Also included are limits on non-residents' currency operations as a barrier against short-term speculative flows.