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. Last Updated: 07/27/2016

Ruble Hits New Low in Fearful Market

The ruble exchange rate tumbled to an all-time low Wednesday of 1,355 to the dollar Wednesday, driven down by fears that the government is about to drop its anti-inflation program.


The ruble fell 42 points in trade at the Moscow Interbank Currency Exchange, continuing a downward trend which has seen the ruble fall in value by 6 percent in the past three days.


Traders expected further falls for the rest of the week and blamed the ruble's weakness on signs that Prime Minister Viktor Chernomyrdin is about to reshuffle his cabinet, reducing the power of key economic reformers, including Finance Minister Boris Fyodorov.


They also attributed the fall to signs that inflation which the government has recently dragged down to 12 percent a month from 26 percent at the start of the year will soon reignite.


According to the government's Center for Economic Reforms, inflation for the first week of 1994 ran at 6.3 percent, the highest weekly rate since September, Interfax reported.


The fall in the ruble's value will also place strain on hard-currency shops who are adjusting to a new Central Bank decree banning cash sales in hard currency.


Initial demand for dollars at Wednesday's trade came to $154.4 million, vastly outweighing supply of only $129.8 million. As the rate fell rapidly at the auction, traders said that the Central Bank stepped in to sell dollars. This lifted the total volume of trade to $148 million.


Igor Doronin, head analyst for the Moscow Interbank Currency Exchange, said: "The Central Bank is trying to stop the growth of the exchange rate by selling its hard-currency reserves. But that is not enough, its reserves are not unlimited."


Doronin said the market wanted a clear statement from the government or the Central Bank about the direction of economic policy and was not satisfied by remarks by Chernomyrdin on Tuesday, which promised changes to reforms.


The ruble also fell to 1,335 to the dollar on the Petersburg Currency Exchange and the Deutsche mark dropped to 775, down from 754 in trade in Moscow on Wednesday.


The ruble hit its previous low of 1,299 to the dollar on Sept. 23 after Yeltsin dissolved parliament but in general the currency has held steady at between 1,100 and 1,250 for the last six months.


Finance Minister Boris Fyodorov started a program to support the ruble in May, reducing the budget deficit, raising interest rates and forming an alliance with the Central Bank to support the ruble on the market.


Doronin pointed out that a fall in the ruble exchange rate on currency exchanges was now a much more serious shock for the Russian economy than it had been in early 1992 when only a small percentage of currency transactions passed through the exchange.


He said that the fall in the exchange rate would have an immediate effect, raising the price of billions of dollars of imported goods now flowing into Russia.


In Moscow, hard-currency stores said they were raising ruble prices sharply to protect themselves from future falls in the currency. Since Jan. 1, the Central Bank has banned all sales in hard currency.


Stores reported that it takes them between five and 10 days to convert their rubles into hard currency.


"Starting Wednesday we will calculate the ruble equivalent of the prices at 8 percent above our bank's current exchange rate," the commercial director of the Colognia supermarket said. He declined to give his name. He said it took his store about a week to convert its income in ruble cash into Deutsche marks.


"I would be happy to use the rate at which our bank sells hard currency, but how do you know it a week in advance?" he said. "You will lose all the way unless the exchange rate is inflated."


Irina Matveyeva, the director of the clothing store, Salentini, said she would add 4-5 percent to the official exchange rate to secure the shop's incomes until they are converted to dollars.


"In the past we never had to buy dollars from the bank, but selling them took us nine working days," Matveyeva said. "If it takes as long as that to buy dollars, we will go up in flames."


At the Olympic supermarket, the exchange rate Wednesday was as little as 10 rubles above the Moscow Interbank Currency Exchange's 1,335. The general director, Gerard Meyers, said he would attempt to keep the margin low even though it takes the shop five days to convert rubles into dollars.


"If the ruble falls more sharply I will think about setting a rate much higher the official one," Meyers said. "But for the moment I am not so worried. A lot of Russian customers coming in -- that's what I want, not much profit in very short time," he said.