Install

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

. Last Updated: 07/27/2016

EDITORIAL: Devaluation Of Ruble Premature




The question of whether Russia should devalue the ruble to solve the financial crisis has been posed from two crucial directions in the past two days. First, billionaire financier George Soros said Russia's situation was "terminal" and suggested a devaluation of 15 percent to sort things out.


More worryingly, the Central Bank resorted to methods for restraining speculation against the ruble that were scarcely consistent with a market for a freely convertible currency -- imposing administrative restrictions on certain banks to stop them from buying dollars for speculative purposes. The measures themselves have apparently already been eased, but their use certainly created an atmosphere of crisis.


Despite the panic, it is worth remembering that Russia is not in any imminent danger of aforced devaluation or a debt default. The Central Bank still has more than $17 billion in reserves to defend the ruble by more conventional means. This is certainly enough to last until the end of the year.


The Russian government may be having trouble borrowing money to refinance its debts, but with International Monetary Fund and Central Bank help, it too can last for a couple of months.


This gives Russia time to consider policy options and hope for an improvement -- and there is hope for an improvement.


The current panic has been caused by a combination of ugly factors. Investors are reluctant to buy Russian treasury bills or hold rubles largely because of the fall in world oil prices, on which Russia depends, and also because of the bad news from Japan and Wall Street. All of these things could change for the better.


And investor sentiment about Russia will also improve if the government continues to make progress toward improving its finances and manages to push its austerity package through parliament.


Later in the year it may be possible to raise more money on commercial markets, albeit at high prices. Privatizations could also be used to raise cash.


On the other hand, no one should be fooled into thinking devaluation is a costless panacea. It will not of itself solve the government's fiscal problems. Even Soros admits that it will terrify markets and can only work if the International Monetary Fund and the Group of Seven chip in another $30 billion to steady nerves. And of course, devaluation will cost ordinary Russians a lot in terms of higher inflation.


If things do not improve, the doomsayers could be proved right. But the country still has a good chance of riding out the crisis without resorting to the Russian roulette of a ruble devaluation.