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. Last Updated: 07/27/2016

Central Bank Steps In to Rescue Ruble




The Central Bank announced Friday a major tightening of policy to ward off a speculative attack on the ruble and shore up investor confidence in Russia's shaky markets, which have lost nearly all the gains they made in the past year.


Central Bank chief Sergei Dubinin said the interest rate increase was intended to squelch rumors of a ruble devaluation, which have put pressure on the markets.


"This action was aimed directly at staving off the threat of a devaluation," he said in remarks reported by Reuters. "This threat did not exist, except in the inflamed imaginations of some people."


The decision to jack up interest rates was generally welcomed by investors worried about the ruble and contagion spreading from Asia's financial upheaval, but economists said bolder moves are needed to prevent Russia from becoming the next emerging market to be hit by a crisis.


"The short list is Russia and Brazil," Rudi Dornbusch, an economist at the Massachusetts Institute of Technology, was quoted by Reuters as saying at the World Economic Forum in Davos, Switzerland.


The Central Bank raised its key refinancing rate to 42 percent from 36 percent effective Monday, putting interest rates at their highest level since February 1997. It also increased hard-currency reserve requirements for Russian banks.


But yields on one-year treasury bills, which usually fall below the refinancing rate, failed to respond to the move, jumping to 46 percent Friday.


The high interest rates have thrown a wrench into the Kremlin's economic hopes for 1998 because they increase government's cost of borrowing and raise concerns about how Russia will cover its budget deficit. The government had planned to lower rates to encourage lending to industry.


Anxiety about the ruble has driven up yields and contributed to the steep slide on the stock market. The Moscow Times Index of 50 leading shares has plunged 33 percent since Jan. 1.


The market recovered some ground Friday, rising 6 percent, but the increase was widely seen as part of the ebb and flow of a highly volatile market rather than any lasting trend. The gains of last year's market bull run have been all but wiped out, and the Moscow Times Index is at about the level it was in February last year.


First Deputy Prime Minister Anatoly Chubais, speaking to influential entrepreneurs and world leaders in Davos, tried to paint a bright picture of Russia's market. He said he expected T-bill yields to come down to 30 percent in the next 10 days and decline further to between 16 and 18 percent by the end of the year.


"The latest wave of the financial crisis will not alter the government's plans," he said. "It is painful, unpleasant, but not big enough to change our objectives."


Dismissing speculation of a mass outflow of funds, Dubinin of the Central Bank said foreigners withdrew $500 million to $600 million from the government securities market in January. He said the Central Bank's reserves had dropped to $16 billion from $18 billion on Jan.1.


"There is no reason to panic," Dubinin said, adding that the ruble had slipped in value by only about 1.5 percent this month in line with inflation. Economists said the higher yields on T-bills might lure some investors back into the market in the short term, but that concern will soon mount over how the government plans to cover its high cost of borrowing.


"In Russia, the time has come for action," said Jonathan Hoffman, an economist at Credit Suisse First Boston in London. "People want to see tax revenues coming in. ... They want to see cuts in spending."


With tax collection at about 70 percent of targets in 1997, tax reform is considered essential for the government to bring order to its finances. The government is due to submit a revised tax code to the State Duma on Feb.1 and hopes are high that the bill will face a warmer reception than last year's code, which deputies rejected.


Economists said Friday the sense of drift in the government's economic policy ever since Chubais was demoted earlier this month had contributed to the sense of malaise among investors. Though he remains one of the Kremlin's two deputy prime ministers, Chubais lost control of the Finance Ministry in a recent Cabinet reorganization that was widely interpreted as a sign of pressure on the reform wing of the government.


"There is a lack of coordination on financial policy," said Maxim Shashenkov, managing director at Alfa Kapital in Moscow. "There is no one on top that can coordinate policies. ... In a time of crisis, there is infighting."


Investors have been unnerved by expectations of a Cabinet reshuffle and a string of bad news about corporate governance issues, including a leadership struggle at Russia's giant electricity monopoly, Unified Energy Systems.


Some of those concerns were eased Friday when Prime Minister Viktor Chernomyrdin announced that Chubais and his fellow reformer, First Deputy Prime Minister Boris Nemtsov, would remain in government.


But concerns about the what appears to be a slowdown of reforms continue to hang over the market.


The climate of uncertainty has caused leading Western investment banks to issue warnings to investors about ruble risks. In a research note issued before the interest-rate increase, J.P. Morgan said an inadequate policy response to the market crisis "put Russia among the riskiest of emerging markets."


The Central Bank's move to increase interest rates reinforced the ruble Friday, which strengthened to 6.0475 to the dollar on the Moscow Interbank Currency Exchange -- but well off its level of 6.012 last week.