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In A 'Panic,' Russians Trading Rubles For Dollars

A currency exchange office in Moscow
A currency exchange office in Moscow

Russian President Dmitry Medvedev proudly says he keeps his personal savings in rubles. Prime Minister Vladimir Putin calls buying dollars a "dubious business." And the mass-circulation daily "Izvestiya" warns readers -- inaccurately -- that the United States is planning to remove $50 and $100 banknotes from circulation, making the greenback's future unstable.

In the wake of the global financial crisis, Russians have been storming currency exchange booths in recent weeks, rushing to sell their rubles and retreat to the relative safety of the U.S. dollar. And the authorities have been frantically trying -- mostly in vain -- to convince them to stop.

Analysts say, however, that it will take more than a high-profile public relations campaign to stop the sell-off.

"Of course, this is a panic," says Mikhail Delyagin, director of the Moscow-based Institute for Globalization Studies. "When a ship has a hole in it that nobody is able to fix, then the passengers begin thinking about how quickly they can get to the lifeboats."

The ruble has slid 12 percent against the dollar since August due to investor jitters from the war with Georgia, a mass exodus of foreign capital from emerging markets worldwide in the wake of the global financial crisis, and falling oil prices. On October 31, the Russian currency was trading at 27 to the dollar, down from 23 in July.

Russia's Central Bank is estimated to have spent $15 billion a week in recent weeks to keep the currency from falling further.

The Ghost Of August 1998

Throughout the tumultuous 1990s, the dollar was the currency of choice in Russia due to high inflation and an unstable ruble. But under Putin's rule, with Russia flush with oil revenues, a strong ruble has been a major point of pride. Landlords began charging rents in rubles after taking only hard currencies throughout the 1990s. People stopped immediately changing their salaries into dollars. Shops stopped accepting foreign currencies.

Now, suddenly, all that progress appears to be at risk.

The ruble nosedive has also revived bitter memories of the country's August 1998 financial meltdown, when Russia defaulted on its international debts and the ruble lost two-thirds of its value, wiping put the savings of millions of ordinary Russians.

According to media reports, Russians have converted nearly $3.5 billion from ruble-denominated accounts into dollar-denominated accounts.

"People have started buying any hard currencies," Yulia Stapovskaya, an official with Uniastrum Bank in Moscow, tells RFE/RL's Russian Service. "When the dollar is rising, they buy more dollars. When the dollar falls a few kopeks, then they buy euros. People are afraid to keep their money in rubles."

Stapovskaya says older customers in particular are increasingly worried about protecting their savings. And in recent weeks, she says that she has felt as much like a therapist as a banker.

"The 1998 default showed people that the state doesn't always meet its obligations," she says. "Many of our clients are getting worried about protecting their funds. And, of course, many of them come and we sit with them as if we were psychologists."

Depleted Reserves

Russia's currency reserves, which reached a high of $600 billion in August, have fallen below $500 billion for the first time as the government is saddled with bailing out the country's ailing financial sector and propping up the currency at the same time. Last week alone, Russia's reserves fell by a record $31 billion.

Roland Nash, the head of research at Renaissance Capital, a Moscow-based investment bank, says that, given recent history, Russians have a knee-jerk reaction to dump rubles in times of economic turmoil. But he adds that Russia has sufficient currency reserves to defend the ruble for the time being.

"Given the way that global markets have been trading over the last few weeks, anything is possible right now," Nash says. "But with just under $500 billion in reserves, the [Russian Central Bank] is in a position right now that it can still have a lot of influence over what happens to its currency."

The Russian Central Bank has tried to stem the flight from the ruble by placing daily limits on currency swaps, in which investors are able to borrow rubles against existing dollar positions without exchanging actual money.

Some analysts say that the Russian government's bailout of the financial sector, in which $200 billion will be distributed by the state-run Vneshekonombank, has had the unintended effect of driving the ruble down.

"The Russian state is injecting rubles to support the banking system. This is the right thing to do. But what is wrong is that they are not controlling how these rubles are being used," says Delyagin of the Institute for Globalization Studies. "They have not forbidden currency speculation [with these funds]. As a result, a significant amount of these rubles are being used to purchase dollars and other currencies on the exchange markets."

And while Russia still has sufficient reserves to fight off a ruble collapse today, if global markets do not recover soon, and if oil prices continue to fall, the government may be faced with a painful decision down the road.

"If the global financial situation remains in the state that it has been in over the last couple of months for the next couple of months, then there is a danger that Russia will be put in a position where it is forced to devalue, and that would be a big mess," Renaissance Capital's Nash says.

RFE/RL's Russian Service contributed to this report.

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RFE/RL Russia Report

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