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. Last Updated: 07/27/2016

Despite Naysayers, Ruble Proves Itself Resilient




In a rare show of solidarity, the Russian government in recent weeks has been scrambling to send international investors a simple message: Rumors of the ruble's demise are greatly exaggerated.


Russia analysts say the word is getting through. "There have certainly been some good things happening recently," said Jonathan Hoffman, an economist at CS First Boston in London. "Never say never, but it looks a lot steadier than it did two weeks ago."


The consensus is that the Central Bank will be able to hold the Russian currency near its planned 1997 pivot rate of 6.1 per dollar for at least the next three to six months, barring any new shocks from Asia. The longer term prognosis, however, depends on the government's ability to live within its means.


Reports of an imminent sharp devaluation have dogged the Russian currency for the past two months, ever since the October financial crisis in Asia triggered head-spinning drops on the country's stock and bond markets. Foreign investors pulled some $7 billion out of Russian government bonds from October through January, cutting their share of the market from 35 percent to about 25 percent, or $13 billion. Meanwhile, the Central Bank's hard currency reserves, which it uses to defend the ruble, fell from about $23 billion to $16 billion.


The financial turmoil caught Russia at a bad time. First deputy prime ministers Anatoly Chubais and Boris Nemtsov, charged with implementing key economic reforms, were losing the support of President Boris Yeltsin, leading the international community to wonder who was in control of the country's economic policy.


But the threat of a ruble crash galvanized the government, prompting decisive moves, which some analysts say have put the country in better shape than it was even before the Asian crisis hit. The president has, at least temporarily, thrown his weight behind the embattled Chubais and Nemtsov, who have promised to curb the power of Russia's giant financial-industrial groups, slash expenditures and freeze government borrowing until the second quarter of this year.


Central Bank Chairman Sergei Dubinin has shown his determination to keep the national currency under control, increasing interest rates in a move that has helped bring $1 billion to $1.5 billion back into government bonds over the past two weeks. Deputy Finance Minister Oleg Vyugin indicated last week that Russia would not succumb to heavy deficit spending despite unrealistically high spending targets in the 1998 budget. "Finally, the Russian authorities have learned that there is nothing better than a balanced budget and nothing better than not to borrow," said Brigitte Granville, chief economist for Russia at JP Morgan in London. "The fundamentals right now are positive. The irony is that they are much better now then they were before the crisis in 1997."


The government's actions have won it a vote of confidence from International Monetary Fund head Michel Camdessus, who, during a visit to Venezuela last week, praised the Central Bank's efforts to defend the ruble. Camdessus is scheduled to visit Moscow this week, reportedly to review Russia's economic program for 1998 and decide on the release of another $670 million quarterly tranche of a $10 million credit.


"I think you're going to see positive comments from the IMF in the coming days," said Hoffman, pointing out that tax revenues, one of the fund's biggest concerns, were up 30 percent in January compared with the same month last year.


Still, the country is not out of danger, and the ruble could face more pitfalls closer to the end of the year when high-yield treasury bonds come due. The government's most recent issue of nine-month bonds last week yielded an annual rate of about 34 percent, a significant improvement over the previous auction but still way above pre-crisis yields of about 18 percent. International ratings agencies Moody's and Fitch IBCA have announced that they will review Russia's long-term credit rating for a possible downgrade.


According to Andrei Yashchenko, head of fixed income at the Montes Auri investment fund, each 10-percent increase in bond yields costs the government an extra $6 billion in annual debt servicing expenses. If interest rates stay high, the Finance Ministry will be hard pressed to fulfill its promise that debt servicing can be done within the limits of the 1998 budget.


"The increased interest rate is a very hard burden for the Russian financial system, especially for the Russian budget," said Yashchenko. "It will be all right only if the recent declarations on the radical reduction of budget expenses come through. If not, that will be really a problem."


Another long-term threat is weak international commodity prices, which cut into the value of Russian raw material exports, thus decreasing the amount of hard currency coming into the country. Combined with an increased outflow of money to service government debt, this could turn the country's current account surplus into a deficit, putting pressure on the ruble to devalue.


But Roland Nash, chief economist at the MFK Renaissance investment bank, said government efforts to stem capital flight could easily outweigh the current account situation. He cited the recent increase in tax receipts as evidence that some progress was being made in stopping Russian enterprises from sending money out of the ruble economy.


"It's the inflow and outflow of capital money that is important," he said. In the past three years, "the capital flying out of the country far outweighed the current account surplus that Russia enjoyed."


While Russian officials have been striving to show that they are serious about saving the ruble, Moscow traders and pundits have been weaving conspiracy theories about who would stand to gain from a crash, most of which star one or another of Russia's leading financial-industrial groups.


In reality, it's very difficult to say who would gain in the short term from a ruble devaluation. Most of the financial-industrial groups are formed around powerful banks such as Uneximbank and Menatep, which would almost certainly lose.


Many banks -- for example, Uneximbank's MFK Renaissance -- have been selling ruble forward contracts to foreign investors in the bond market as a hedge against currency risk. The contracts are essentially a promise to sell dollars at a certain rate -- say 6.1 rubles -- at a certain date in the future. If the actual ruble rate falls, the banks stand to lose a lot of money on the contracts: According to Yashchenko, as much as $10 billion in such forward contracts are still outstanding. Some of the contracts are hedged with the Central Bank, but Yashchenko believes that the hedging is minimal.


The financial-industrial groups, however, also own a lot of export-oriented companies: Uneximbank, for example, controls oil company Sidanko and metals giant Norilsk Nickel, while Menatep controls the oil company Yukos. Because these companies sell most of their products abroad for foreign currency but pay most of their bills here in rubles, they would stand to gain from a devaluation.


Nobody but the groups themselves can guess if the gain to the exporters would be greater than the loss to the banks. But in the long term, a sharp devaluation would be harmful to everyone and particularly to the government, which has built a great deal of political capital on the currency's stability over the past few years.


"I don't really see who can benefit [from a devaluation]," said Granville. "In terms of stabilization it would send Russia back to four years ago. At the end of the day, what everyone needs is for growth to start again in Russia."