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. Last Updated: 07/27/2016

Central Bank Stakes Economy on Ruble




Russia has staked its economic future on a strong ruble despite threats that the unsophisticated market will fall prey to foreign speculation, Russian economists said Tuesday.


Russia's very lack of sophistication, however, could help neutralize the speculators, analysts said, and the Central Bank's determination to defend its currency is unlikely to be in vain.


The Central Bank is ready to defend the ruble at high cost because the real Russian economy has little to do with the stock and bond markets inhabited by foreign investors.


The impact of devaluing the ruble, a persistent rumor often squashed by the Central Bank only to surface again, would wipe out savings as well as popular confidence in the government.


The impact of an interest rate increase, however, is far more limited, analysts said.


"In Russia, there is something of a divide between the financial sector and enterprises," said Russian European Center for Economic Policy economist Rory MacFarquhar.


Russian companies, which generally sell products on barter terms, have very little bank debt, and so there is little for the real economy to lose or gain from interest rate moves.


Average Russians do not look at markets -- they look at the ruble's price in exchange booths across the country.


And the Central Bank, striving to make the ruble accepted in its own country, sees the street as the real battleground.


To win this battle it is willing to sacrifice growth, and last week it raised the interest rate benchmark refinancing rate to 42 percent from 28 percent to prove it would not devalue.


"The increase in interest rates is an unpleasant story for Russian economic growth," first deputy chairman Sergei Alexashenko said after the increase. "Nevertheless, we believe that currency devaluation is much worse."


The Central Bank forecasts that capital investment will fall this year, largely because of higher interest rates, but said broad expectations for growth and other fundamentals would not be affected significantly by the higher rates.


It forecast the economy would be flat to 1 percent bigger this year, against previous budget forecasts of 2 percent growth.


"There is a general assumption in mature industrial democracies of a political ceiling to interest rate rises," said Christopher Granville, research director at United City Bank brokerage in Moscow. "There is no such ceiling in Russia."


Foreign holdings in domestic treasury bills could be covered by Central Bank reserves in a worst-case scenario, Granville said in a recent paper. The ruble forward market is too undeveloped for effective attack, which leaves the Central Bank in charge so long as it controls daily ruble trade, which it handled during a similar crisis of confidence late last year, he wrote.


"There is no fundamental change in the conditions that allowed the Central Bank to achieve this control last December," he wrote.


Only a popular or wholesale bank stampede to sell rubles might endanger the Central Bank, said Roland Nash, of MFK-Renaissance investment bank.


"It is difficult to see how the financial markets can cause a crisis, but they can certainly prove to be the catalyst by which a crisis does occur," he said.


But Nash said the immediate problem facing Russia was the government's poor expression of its economic plan.


A Western diplomat said the economy needed a boost from the top, with President Boris Yeltsin and Prime Minister Viktor Chernomyrdin clearly outlining a revised fiscal program in light of the Asian crisis that will make it more costly for the government to function.


"We are not at a catastrophic situation now, but the time has come for them to demonstrate to the market that they have the situation in hand and are dealing with it," the diplomat said. "It goes to credibility. They have to say things that are in sync with reality. And if they don't, it makes people wonder if they have a good handle on reality."