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. Last Updated: 07/27/2016

Russia Thought Unlikely To Form Currency Board




LONDON -- Russia is unlikely to have the political will to establish and maintain a currency board and such a move may be ill-suited to address the ruble crisis, Western analysts said.


Financier George Soros called Thursday for a 15 percent to 25 percent devaluation of the ruble to be twinned with the creation of a currency board backed by $50 billion of reserves.


"A currency board in principle is a fine idea, but there is absolutely no chance in practice of it being implemented," said Charles Blitzer, chief emerging markets economist at Donaldson, Lufkin & Jenrette in London.


"It is impossible to believe in the Russian government or the parliament wanting to give up sovereignty over monetary policy," added Blitzer, who was formerly chief economist at the World Bank's Moscow office.


A currency board would fix the ruble exchange rate to the dollar or euro by at least matching notes and coins in circulation with hard currency reserves, which Soros said would require additional Western financial support of $15 billion.


But since currency boards pledge to make good local currency sales at the preset level, a drop in demand for the ruble can only be met with higher interest rates. The market thus effectively sets interest rates and central bankers are forced to stand passively by.


Russia's Central Bank said Thursday that Soros' plan would not solve the crisis but would create opportunities for speculation.


Mark Cooke, chief investment officer at Brunswick Capital in London, said he doubts that Russia's economic and market infrastructure could cope with the strain of a currency board system.


"I am fairly skeptical," he said. "It would be a fairly tricky thing to work."


Nick Douch, emerging market currency strategist at Barclays Capital in London, said that punitively high interest rates would test Russia's resolve to stick with any currency board.


"The currency board can't change the political will and what we are all worried about in Russia is the political will," he said.


He contrasted Russia to Argentina, which instituted a currency board in 1991 and stuck with it largely due to steadfast support from President Carlos Menem.


But Stephen Barber, executive director of Pictet Asset Management in London, said a currency board could work to bring rates down to an acceptable level.


"It is not a solution to Russia's problems but it may well be the most effective way to stabilize the situation in the short term," he said. "If the ruble is brought down to a level which reflects the real [dollar] appreciation which has been caused by the fall in oil prices, then it would allow interest rates to fall rapidly."


Analysts and fund managers expressed broad agreement that with or without a currency board, devaluation of the ruble was in the cards but few cared to say when or by how much.


"We can all pick numbers out of hats. What we are dealing with is a total lack of confidence, and in some parts, panic," Cooke said.