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. Last Updated: 07/27/2016

Monetary policy: change of course?

The political storm this week over the resignation of the Russian Central Bank chairman, Georgy Matyukhin, may now be set to seed a hurricane, as the government rethinks the monetary disciplines Matyukhin sought to implement.


Even before the controversial bank chief announced his departure, government spokesmen had disclosed plans to reverse his policy of tight constraints on money supply. and now, given parliamentary demands for the easing of credit restrictions, the price charged commercial banks for use of government funds in their lending operations may well also be reduced.


That was the key dispute which, early this week, led to Matyukhin's dramatic announcement that he was quitting. The Russian parliament rejected his resignation Thursday, but the problem remains. It is the exact equivalent of debates to be heard practically anywhere in the industrialized West, with spokesmen for business and industry arguing trenchantly for lower rates to permit higher production and demand.


Normally, of course, the argument focuses on a percentage point up or down. It's one measure of the bluntness of the instruments at the Russian authoritie's disposal that the debate here is over a 30-point gap. Two months ago, the Central Bank struck a 50 percent interest rate for its loans to commercial banks. Last week, it announced a decision to raise this to 80 percent.


The reaction was instant and passionate, with politicians defending industrial and agricultural interests and warning of looming bankruptcy for vast sectors of the economy. Bankers, already displeased with Matyukhin's stewardship, objected that the lending business would disappear overnight.


True enough. For most banks, the 80 percent being charged by the Central Bank will get translated into 120 percent payable on commercial loans. For instance, Olga Linguina, head of the loans department at Credit-Moskva, says some of her bank's customers will simply pass that on to their clients. But others, including the new independent farm sector, with its high capital requirements for establishment, will simply drop out of the credit markets entirely.


The alternative, however, may be even worse. Supreme Soviet leaders and, it is understood, some members of the government want to hold the inter-bank rate to 50 percent. But that means lending to the commercial banks at considerably less than the rate of inflation.


On the eve of energy price liberalization, and an expected new burst of inflation, this would allow speculators to borrow money, pay it back with interest and keep a profit - in effect leaving the inflation embedded in the economy instead of wringing it out quickly.


In the weeks before setting its rate at 80 percent, the Central Bank found that commercial bank demand for its funds exceeded supply.


Matyukhin's approach was to try to curb that demand by making it unaffordable. It is, by many standards, a brutal solution. Oil workers were already threatening strike action because their theoretically high wages were not, in fact, being paid - because local banks simply did not have the cash. Such conflicts were virtually bound to proliferate under even tighter policy measures.


But in the absence of many of the other mechanisms to be found in developed market economies, the choices here are stark - either try to protect the ruble from inflation or let it shrivel uncontrollably.


And there is one further complication. Russia and its central bank do not have full control over the ruble. The other central banking authorities of the former Soviet Union have not endorsed Russia's 80 percent rate. That means that, theoretically at least, it is possible to obtain cheaper funds in other Commonwealth member-states, creating huge opportunities for profits through arbitrage. That in turn will bring stray rubles to Russia and away from the other ex-republics, accelerating their movement toward their own currencies.


In other words, either way, the ruble is under threat. Either way, the Central Bank chairman will, inevitably, get the blame.