Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

INSIDE FINANCE: New Year Promises Tumbling Ruble as Reserves Disappear

The ruble exchange rate has fallen sharply in the last few days, passing through the 20-rubles-to-the dollar mark. That's only the official rate. Exchange points are selling dollars for 22 or 23 rubles.

After the devaluation at the end of August, the rate held firm at about 15 or 16 to the dollar and stayed there for about three months. But then, the Central Bank printed and threw into the economy about 30 billion rubles. The laws of the Russian economy are such that when you push new rubles into it, they quickly get channeled into the foreign exchange market.

People who are now ministers in Prime Minister Yevgeny Primakov's government denied this truth for a long time. They used to call for the printing of more rubles, which they thought would be followed by an agreeable increase in productive investment. But that didn't happen. Not in the fall of 1992 or 1994 nor in recent years. After a brief and fairly precise lag, all the extra rubles ended up on the foreign exchange market, contributing to the ruble's decline. Of course, if the economy grows, then fresh money gets absorbed. The economy needs it. But in Russia, nothing but the dollar grows.

Only hard-currency reserves can counterbalance the pressure from newly printed rubles. The mechanism is that the Central Bank can sell its dollars and buy back the rubles that have just been printed. But that erodes hard-currency reserves. Russia now has only $12 billion of reserves left.

Unfortunately, it is hard to trust the Central Bank's official statistics completely. Not all the reserves can be directed into the hard-currency market. Gold and other precious metals make up a significant share of the reserves but in today's market they are highly illiquid. It would also be hard to spend the money that the International Monetary Fund lent in July because it will have to be repaid soon. And a part of the pittance that is left has already been spent on servicing foreign debt.

The structure of Russia's hard-currency reserves is going to get worse. In 1999, the Central Bank's management is planning to increase the portion held in gold. As part of this process, the bank will print a lot of rubles which will be used to buy the gold from domestic producers.

The Central Bank's policy of letting the ruble fall is a strong indication that it is running out of resources. Central Bank deputy chairman Tatyana Paramonova makes no secret of this. She has said that printing as little as 1.5 billion rubles or 2 billion rubles would have a major impact on the ruble rate.

December is usually a good month for the ruble. Exporters always repatriate more dollars at the end of the year to pay for taxes, wages and bonuses. January is always much worse. Every January since 1992, the ruble has tumbled. The country doesn't work for half a month, there are no exports and no hard currency comes back into the country. And people turn the rubles they didn't spend for New Year into dollars. This January will be worse than usual.

But it looks like new rubles will be printed. Finance Minister Mikhail Zadornov has said he needs 25 billion rubles by the end of the year and has no other way of getting them. No one is paying their taxes or giving the state credit.

All this could force the Central Bank and the government to move to limit the ruble's convertibility. A normal economist would say that if the exchange rate is falling and hard-currency reserves are dwindling, then the answer is to limit the printing of rubles. But the risk is that the champions of state control who are now in charge will use a different logic. If the Central Bank's reserves are falling, they say, then all dollars must be sold to the Central Bank and not on one of those newfangled markets. If demand for dollars is rising, speculators must be kept away and dollars will be sold only to those who are doing work that is useful to the state. In the end there could be compulsory sale of all export earnings to the Central Bank, which would also allocate dollars to importers, perhaps via hard-currency auctions. The state would set the exchange rate. And, of course, the system would have to be policed rigorously.

Anyone who traded with the Soviet Union will recall the constant "correct exchange rate" of 64 kopeks to the dollar. Now it's back to the future. A presidential decree with these sorts of measures is already reportedly being drafted.

But the bureaucrats know that back-to-the-future policies will have very nasty consequences: first, more capital flight as exporters hide offshore even those earnings that must one day be brought back onshore to pay hard-currency expenses.

Look what happened after time limits were imposed on how long importers could retain dollars before paying for imported goods. Some brazen Latvian bankers are already taking out newspaper ads for schemes that allow importers to legally retain hard currency for as long as they want. But, of course, in Latvian bank accounts.