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. Last Updated: 07/27/2016

Russia to Pay the Price for Stable Currency

Financial reformers in the Russian government may have achieved their goal of stabilizing the ruble but they could now find that they must pay a price for their success.


As the reformers are not slow to point out, after falling to one tenth of its value in the year before June 1993, the ruble has held relatively steady in the past six months. It stands at 1,247 to the dollar now, down from 1,100 in June, a fall of only about 10 percent.


But if the ruble holds firm, Russia could see a growing wave of tariffs and trade barriers to protect companies in the manufacturing and agriculture industries, many of which are on the brink of bankruptcy, from the cheap imports that the newly stable currency is allowing into the country.


Finance Minister Boris Fyodorov, in an interview with the Izvestia over the holiday weekend, said that Russia's monopolist industrial producers and collective farm managers, who used to bemoan the low ruble exchange rate, now regard the ruble's strength as a curse.


"Even at the start of last year, they were blaming us because the rate was artificially and unrealistically low," Fyodorov said. "Now, a lot of them do not like the strengthening of the ruble."


The reason is that while the price of imported goods has remained roughly the same, the price of domestically produced goods, pushed up by domestic inflation, has jumped four times.


Fyodorov concedes that this has caused a huge shakeout in Russian industry but has said that the government has quite deliberately used the strong exchange rate and cheaper imports to expose the economy to competition.


"Our prices are fast approaching world levels," Fyodorov said. "This means an end to a flourishing period for inefficient Russian producers who could live on the huge price difference."


Fyodorov said that the strengthening of the ruble was showing up the directors of Russian monopoly manufacturers and agricultural collectives who cannot produce goods at a price that can compete with imports, even though Russian labor costs are among the lowest in the industrialized world.


But following their poor showing in last month's elections, reformers may have to compromise on trade policy in order to win a much bigger battle on their goals of reducing the budget deficit and curbing inflation.


Under pressure to save bankrupt industries, Fyodorov and Gaidar may prefer to offer tariff protection, which would hurt only consumers and retailers, rather than issue cheap credits that would come directly from the state budget.


Last week, Gaidar intervened to delay the introduction of a new round of tariffs designed to protect agricultural, alcohol and automobile producers.


The tariff question, however, depends on the ruble remaining relatively stable since, if the ruble dives and imports once again become prohibitively expensive, the problem will go away.


Fyodorov's prediction that the ruble will fall only gradually to between 2,000 and 2,500 to the dollar by the end of the year will be greeted with skepticism by many banking sources.


They have argued that given a monthly inflation rate of 15-20 percent, the exchange rate has only held steady because the government and the Central Bank have proppedup the ruble by intervening on currency markets.


It may be that they are right and the ruble will crash to reflect its reduced domestic buying power. But Fyodorov and others have argued its stability is due, partly at least, to natural market forces.


First, they say that the ruble is now returning to a natural level after a period of panic selling in 1992-3. Second, they say that the high market interest rates in Russia, currently over 400 percent, make investing in rubles a better bet than buying dollars.


Besides, so long as the government remains committed to a strong ruble, it has the money to pay for it. Central Bank chairman Viktor Gerashchenko said recently that hard currency reserves are over $4.4 billion.


The Finance Ministry has another couple of billion dollars in reserves and recently announced that it would use those reserves directly to boost the ruble, even if the occasionally unreliable Central Bank wants it to fall.


The result is likely to be a strange contradiction. The government's macroeconomic policy goal of keeping the ruble high will help importers and hurt local manufacturers but political reality will force the government to introduce tariffs, doing just the opposite.