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. Last Updated: 07/27/2016

The Central Bank's War

For more than a month now the most frequently asked questions at economic meetings and negotiations have concerned the strengthening ruble. Why is this happening and how long might it continue?


As for the first question, it is possible to make some preliminary conclusions. As for the second, I believe that any prognoses are senseless. For one thing, even more than in any other countries, the exchange rate in Russia bears a strongly political character. As far back as Yegor Gaidar's first tour in power, there was a time when the ruble gained strength even as other economic indicators declined. It was necessary at any cost to demonstrate some successes attributable to the young democratic authorities. We all remember what this attitude led to.


In the present case, we see the Central Bank's desire to demonstrate its power over the national economy and over the commercial banks. I am firmly convinced that the Central Bank simply does not understand what it is doing and does not appreciate the consequences of its actions. The depth of the coming crisis -- and I have no doubt that a crisis is coming -- depends in large measure on the extent to which the Central Bank deviates from common sense.


Attempts to present the strengthening ruble as the result of some planned policy do not stand up to analysis. The main policy in question here is the Central Bank's new regulations for the amount that commercial banks must keep in reserve. However, the figures discussed during the bank's negotiations with the Association of Russian Banks show the small degree to which this policy was planned in advance. During a month of negotiation, the initial figures were actually increased several times over, and the conditions under which reserve funds were to be held were also fundamentally changed.


Also, recent events on the currency market came as a complete surprise to the Central Bank's colleagues in the government. Economics Minister Yevgeny Yasin, for instance, stated that he is inclined to consider the stabilization of the ruble as more of a pleasant surprise than as a consequence of economic recovery. Further, the Central Bank's new demands to raise the commercial banks' reserves also came as a surprise to Yasin. Either the Central Bank's assurances that its policies are formulated within the framework of agreed-upon measures are not true, or the economics minister does not participate in the agreement process.


The new commercial bank reserve requirements are at the heart of what has been happening at the currency exchange recently. Because of them, the banks have been forced to sell huge sums of hard currency in order to mobilize enough rubles to fill their non-interest-bearing reserve accounts at the Central Bank. The important thing here is not just the overall amount of hard currency up for sale, but also the scope of the simultaneous increase in the reserve deposits. For major banks, reserves have been increased three to six times over. I am sure that relatively few Western banks could handle such a change without serious liquidity problems. The Central Bank's actions have destroyed a fragile equilibrium and the market has been seized by a real panic. Conditions are ripe for speculation.


The reserve policy is just one major example of the Central Bank's tendency in recent months to treat the commercial banks and other financial structures like little more than a herd of sheep. As a result, these bodies have no stable guidelines for planning and realizing their financial activities. Taken together with the state's tax and customs policies, the Central Bank's attitude is one of the main reasons why such a pitifully small portion of the country's resources are being devoted to real investment.


As a result of the Central Bank's war on the commercial banks, ordinary Russians are the ones to suffer. What else besides stupidity can explain the requirement that banks issue handwritten receipts any time currency is exchanged? This has done nothing but lengthen lines and inconvenience bank customers.


Much more important, the whole country has in a sense become hostages to the Central Bank's caprice, having been deprived of its most important means of holding its savings -- the dollar. Further, interest rates on ruble deposits have been driven down, and Russian exports have become catastrophically less competitive. The Central Bank's policy of buying up hard currency has led to a substantial increase in the amount of rubles available, which threatens to unleash a new round of inflation.


All of the Central Bank's measures are justified by claims that it is trying to direct the resources of the banks and of the population into real investment by first "de-dollarizing" the economy. Unfortunately, of the two methods available for realizing this goal -- the carrot or the stick -- Central Bank Acting Chairwoman Tatyana Paramonova has chosen the stick.


This is too bad because if the banks had confidence in the ruble and in the authorities, this process could have been relatively smooth and painless, as a number of similar processes over the past few years have been. Moreover, when speaking of de-dollarization, it must be recognized that the dollar has played a crucial role for Russians as a defense against inflation during a time when irresponsible Central Bank policies were driving the ruble down.


In a recent address to the State Duma, former Central Bank Chairman Viktor Gerashenko stated that he hoped the deputies would be responsible enough to confirm Paramonova in her post. Gerashenko's constant opponent, former Finance Minister Boris Fyodorov, has held the opposite view, calling on deputies not to make laughingstocks of themselves with such an appointment. Soon, it will be up to the deputies. But if the Central Bank's policies set off an uncontrollable panic among the population, they can only be condsidered criminal. I hope that it doesn't come to this.





Boris Sergeyev is an economic analyst in the banking sphere. He contributed this comment, which expresses his personal opinions, to The Moscow Times.