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. Last Updated: 07/27/2016

Two Cheers For Russia's Central Bank

The 5 percent dive taken by the ruble Thursday did not signal, as it might have done some months ago, that the government and the Central Bank had lost control of the nation's currency. On the contrary, it demonstrated a level of sophistication and judgement that few would have expected from the Central Bank, or its chairman, Viktor Gerashchenko, a year ago.


Back then, Gerashchenko was the man that all liberal economists and Western financial advisers loved to hate and on whose apparent lack of understanding of the market they pinned the blame for runaway inflation and an impossibly unstable currency.


But those days are past. Despite some skeptical comments from the Finance Ministry, all the signs are that the Central Bank knew what it was doing when it failed to intervene to support the ruble Thursday, precipitating the fall. The main aim appears to have been to hit the currency speculators and at the same time devalue the ruble to a more sustainable level.


It was a neat move. Certainly, traders were unmoved by the lurch, predicting correctly that the ruble would rebound Friday. And doubtless some short-term speculators did get their fingers burned -- even if for most the losses were a drop in the ocean compared with the profits they reaped at the Central Bank's expense over the past few months.


This should, however, be a one-off. Gerashchenko should not plan to make a habit of such ploys. Over the past few months, analysts have been pointing at signs of greater confidence in the ruble appearing throughout the economy, with more business deals being carried out in the local currency while the country's capital markets grow at breakneck speed.


The key to this confidence has been stability. It was not necessary to reverse or even halt the ruble's decline against the dollar, which for so long was an unpredictable source of frustration for businesses based here. What is crucial is that the previously volatile decline has settled into a steady, predictable depreciation.


Since February, the ruble has been falling against the U.S. dollar at around 5 percent a month -- a major improvement over the gymnastics it performed after the government scrapped the artificially pegged exchange rate on July 1, 1992. The ruble is still far from being a safe haven for investment, but the progress it has made to date is no mean achievement.


It is in part a tribute to the bank that so many companies no longer have to rely on other countries' currencies to finance their operations inside Russia and that foreign investors have followed suit, pouring billions of dollars into the country's ruble-based stock market. It is vital that Central Bank policy continues to underpin this confidence.