Central Bank Cancels Ruble Trading

The Central Bank on Wednesday shut down trade in the Russian ruble and admitted that it had lost all control over the exchange rate, deepening a panic that has all but destroyed Russia's financial system.

In a desperate move, the Central Bank canceled official trading in the ruble after demand for dollars threatened to send the currency into a free fall. The bank promised trade for dollars would resume Thursday but admitted it lacked the reserves to support the currency.

In one chilling sign of where the currency is heading, the exchange rate for the ruble against the Deutsche mark fell 43 percent in trading Wednesday.

Acting Prime Minister Viktor Chernomyrdin censured Central Bank chairman Sergei Dubinin for allowing the currency collapse. "I am extremely dissatisfied with the work of the Central Bank over the last two days," he said, adding that he would meet with the banker to discuss the crisis.

Chernomyrdin himself flew Wednesday to Crimea where he held talks with Michel Camdessus, managing director of the International Monetary Fund, who was meeting Ukrainian President Leonid Kuchma. But no hope of any solution to Russia's financial collapse emerged from the talks.

The Central Bank, meanwhile, revoked the license of Bank Imperial, Russia's 13th largest bank, effectively closing the bank down. The government has promised to close down several of Russia's biggest banks to preserve the financial system as a whole but the closure of Bank Imperial is the first sign it has the political will to take on the powerful banking lobby.

Wednesday's collapse of the foreign exchange market followed the government's release Tuesday night of the restructuring of 280 billion rubles ($35.6 billion) of state debt on which Russia has defaulted. The deal will see investors receive only a tiny fraction of the face value.

Market sentiment plummeted, and in trade on the Moscow Interbank Currency Market, the ruble had fallen 5 percent to 8.26 rubles to the dollar, down from 7.86 Tuesday.

Running low on reserves and finding itself the only money-changer on the market willing to sell dollars, the Central Bank cancelled $277 million in completed dollar deals and pulled out for the day.

"The Central Bank does not believe it possible to sell its currency reserves and balance the market given the significant demand for hard currency and the reluctance of commercial banks to sell it," a spokeswoman reportedly told Interfax.After cancelling the auction, the Central Bank tried to turn back the clock, setting the official rate at Tuesday's rate of 7.86 rubles to the dollar, but the damage had already been done.

Even at this rate, the currency has fallen 24.78 percent since the government announced the debt rescheduling Aug. 17 alongside a 90-day moratorium on debt owed by Russian banks to foreign creditors and a widening of the band within which the government would defend the ruble against the dollar.

The ruble is now threatening to burst below the minimum level of 9.5 to the dollar that the Central Bank last week said it would protect.

While the dollar is the main market indicator, the much less traded Deutsche mark fell to 7.6 rubles to the mark from 4.37 rubles Tuesday on a volume of 22.29 million marks, a drop of almost 50 percent.

Anatoly Chubais, the government's chief liaison to the IMF and other foreign lenders, said the economy was at its most dangerous stage since the fall of the Soviet Union in 1991

Economists shared his pessimism, fearing that the current cash crunch would tempt the government into printing money, something that would almost certainly fuel inflation.

"It seems the trust is so shallow in the ruble," said Al Breach, an economist with the Russian-European Center for Economic Policy. "Everyone thinks the government is going to print money, and I think they're right."

Without a guide post, blind speculation took over on the streets, with some exchanges offering rates of 10 rubles to the dollar.

The Central Bank has been battling on two fronts, trying to keep money tight to defend the national currency's value on the one hand, but also trying to keep banks flush with enough cash to pay out depositors.

Strapped for cash itself, the Central Bank felt the pressure building as it loaned credits to the banks, then sold dollars to mop up the extra rubles in circulation that were hurting the currency's value.

The pressure built last week, as the bank shelled out $1.8 billion defending the ruble on the Moscow Interbank Currency Exchange, or MICEX, according to Arnab Das, a currency analyst with J.P. Morgan. Things appeared no better this week, with sales of $220 million Monday and $430 million Tuesday, he said.

The Central Bank had reserves of $15.1 billion on Aug.14 but most of this was in illiquid gold and diamonds.

Although Wednesday's events followed closely the government's announcement on debt terms, one analyst said it was unlikely the two were linked.

I think these things just happen," said Breach. "You know, pressure in a dam. ... Each day the queues in the banks get bigger, and it just bursts."J.P. Morgan analyst Das said: "The most important conclusion is that, one, reserves are much lower than had been expected ... [and] that two, the external debt moratorium for the private sector, the GKO payments standstill and the widening of the band have failed to slow down the flight of capital into dollars."

The Central Bank denied late Wednesday that it was considering any limits on currency operations, Interfax reported, citing Irina Yasina as saying that such a move would signify "a transition to a different economic model."

But as the markets prepared for a new day of trading, traders and analysts said there were concerns the government would impose currency restrictions, such as requiring invoices proving the money sought to be changed originated from hard-currency sales.

Analysts were skeptical of any effort to control the market.

"Capital controls and restrictions of that sort never work," said Das. "Market forces operate, and if there is an administrative effort [to control them] something else will give."

That "give" would most likely mean a resurgence of the black market and a two-tier exchange rate; one dictated by the Central Bank, one by the street.

"It hasn't formed yet ... but if the Central Bank pursues this policy, it's going to happen," said Breach.