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. Last Updated: 07/27/2016

New bank chief: The lesser evil?

Russia's new Central Bank chairman, Viktor Gerashchenko, has undone in just over a week what took his predecessor and the International Monetary Fund six months to achieve.


That, however, is not necessarily bad news and may be just what the Russian economy needs, given plummeting production and a ruble which ultimately was only supported by large cash infusions from the Central Bank and false faith created by the Russian government's optimism.


While the IMF-induced strict monetary and credit policies of the bank's former chairman, Georgy Matyukhin, helped quell chaos and spur imports earlier this year during a period when the government needed to flood the market with relatively cheap foreign goods, that time is now over. The government banked on a convertible ruble supported only by money, which would lead to increased foreign investment. It found neither.


Production has suffered because of it, and unemployment is rising.


Tight credit has forced many enterprises to the brink of bankruptcy, and a shortage of cash brought on by surging inflation and tight money has left many workers unpaid. In his first full week as chairman, Gerashchenko - who is known as a banker of the Soviet era, not as a reformer - blasted his predecessor and overturned his policies, munity questioned his methods.


"There was some kind of faith in the ruble before", said Peter Derby, president of DialogBank, a U. S. joint venture and one of the leading commercial banks in Russia. "With his remarks, he discredited the ruble. That was stupid. If he wasn't going to support it, he shouldn't have said it".


In response to Gerashchenko's


announcing that the government would no longer "waste money" supporting the ruble but would instead concentrate on paying off the country's massive foreign debt. Russia has spent more than $500 million this year intervening to prop up the ruble.


Businesses in Moscow generally praised Gerashchenko's decision as "economic reality", given current conditions, but some in the banking community questioned his methods.


"There was somekind of faith in the ruble before", said Peter Derby, president of DiologBank, a U. S. joint venture and one of the leading commercial banks in Russia". With his remarks, he discredited the ruble. That was stupid . If he wasn't going to support it, he shouldn't have said it".


In response to Gerashchenko's announcement, the ruble dropped sharply to 161. 1 per dollar Tuesday at Moscow's twice-weekly currency auction, down from 155. 7 last week. When Gerashchenko was appointed, the ruble traded at roughly 138 per dollar.


Central Bank intervention is tailing off, while revenues expected from the forced sale of hard currency imposed on exporters have not materialized. The ruble is weak and getting weaker.


Praise for Gerashchenko has been minimal, in general, given his past ties to Soviet banking and the old school of thought. and while initially his policies may be the only way to save Russia's economy, there is still doubt about his ability.


"I don't think it's all good news", Derby said. "It tells you that there are no capable people left in this country. I was hoping we were moving forward instead of back". But he conceded that a new banking law signed Monday by Gerashchenko allowing Russians to buy up to $500 with rubles without a passport was an important step.


Ultimately, given soaring inflation last month - estimated as high as 52 percent, although only 12 percent officially - and the introduction of 5, 000-and 10, 000-ruble notes earlier this month, hyperinflation and a ruble freefall are quickly becoming reality.


There is only one option for the Central Bank chairman when the alternative is low output, tight credit, inflation, unemployment and complete government bankruptcy. IMF or no IMF, the present course appears the lesser of two evils.