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. Last Updated: 07/27/2016

Ruble Threatened By Freer Trading




In a move that raised fears of another sudden devaluation, Russia has agreed to dramatically liberalize foreign exchange trade as part of an economic program agreed upon with the IMF, according to a newspaper report Friday.


Neither government nor Central Bank officials would confirm or deny the accuracy of the report. However, the Central Bank lent credence to the report later in the day when it removed a crucial restriction on foreign exchange transactions.


That move sent the ruble down in Friday's electronic trading session. The ruble's weighted average on the Moscow Interbank Currency Exchange was 24.2887 to the dollar, down from 24.2137 on Thursday.


The Central Bank set the official exchange rate at 24.29 rubles to the dollar, down 8 kopeks in the first drop for the currency since June 11. The ruble had been climbing for most of the past three months after touching a low of 25.12 on April 7.


The bank said Friday foreign banks will again be allowed to buy hard currency with rubles held on their correspondent accounts with the Central Bank, news agencies reported.


Economists were critical of the agreement published Friday, which they characterized as overly rigid f especially regarding the freeing up of hard currency trade f and ultimately disastrous for Russia.


"The IMF's role in Russia has been destabilizing from the very start of the reforms," said Nancy Herring, head of research with Regent European Securities.


Anything that threatens the ruble's stability is playing with fire, she added.


"In the past months a stable ruble helped bring inflation down and fueled the stock market rally," Herring said.


The Central Bank did attempt to lessen the dangers contingent on freeing up foreign banks' correspondent accounts. It introduced a restriction stating that hard currency purchases from these accounts can only be made using the proceeds of current account transactions, banning use of the accounts for speculative hard currency purchases.


Nevertheless, restoring foreign banks' capacity to make such transactions is likely to cost Russia $200 million a month in capital flight, economists estimated.


The detailed agreement f printed Friday in full in Kommersant f commits Russia to letting the ruble trade more freely, shutting troubled banks, tightening control over the free-spending bureaucracy and forcing monopolies and off-budget funds to publish Western-style accounts.


It also stipulates that Russia should stop using offset schemes, increase cash collection in major industries, force oil companies to pay taxes, lay off 41,000 civil servants, stop giving loans to ailing banks, restructure the banking system and halt oil supplies to refineries saddled with debts.


However, few analysts expected that the agreement will end up being anything but window-dressing.


"They will make disbursal of the second tranche conditional, but the agreement does not set deadlines for most of the measures," said Parvoleta Shtereva, fixed-income and currency strategist with MFK-Renaissance.


The one area that is likely to prove an exception is the liberalization of foreign exchange trade, which is the area most likely to bring Russia grief. In the 1980s, the IMF applied a similar set of policies in Brazil, helping to isolate that country from capital markets for almost a decade, Herring said.


"I wonder why the IMF seeks to repeat that kind of experience in other emerging markets," Herring said.


However, the IMF's demands would seem to fit with the general economic consensus that has been forming in recent months that countries are best with either a fully free-floating currency or with its opposite, a rigid currency board f in which the currency is pegged to another, hard currency at a fixed rate and any fresh emissions of money must be backed by an equivalent level of reserves, Shtereva said.


The agreement to be signed with the IMF says Russia will allow floating exchange rates, a sharp reversal from policies pushed by the IMF over the past years, such as the floating or crawling peg that Russia attempted from 1995 until its disastrous collapse last August.


Other analysts said the IMF was taking advantage of various Russian power brokers who were already pushing for a fresh devaluation in order to guide the country toward a more liberal exchange rate policy.


"People in the IMF are no fools and they simply understand that devaluation is imminent," said Mikhail Delyagin, who served as an aide to former First Deputy Prime Minister Yury Maslyukov and now heads the Institute for Globalization, a left-leaning research center.


Delyagin on Friday added his voice to a swelling chorus of speculation from media, political and economic analysts that the ruble will take another dive in July or August due to growing supply of domestic currency on the money market.


One of the main reasons that such a devaluation is being predicted is the more than 50 billion rubles on commercial banks' accounts at the Central Bank and a swelling tide of ruble deposits in individual and corporate accounts that could easily be converted into dollars if panic strikes after the Central Bank restrictions on foreign exchange trade are lifted.


Several Moscow publications have recently alleged that the ruble will fall in the coming months.


Weekly newspaper Versiya referred to a classified report, submitted to the government, which forecast that the exchange rate will slump to 35 to 38 rubles to the dollar at mid-July and than rebound to below 35 rubles per dollar.


And Dengi, a weekly magazine put out by Kommersant, also had a large spread in this week's issue predicting the demise of the ruble.


Meanwhile, Sergei Kiriyenko, who oversaw 1998's devaluation, earlier this week defended the move, pointing to the stimulatory effects on the economy that had been brought about by the surge in price competitiveness that followed.


A fresh devaluation would be a boon for commodities exporters, especially oil companies, who could be angling for a devaluation in return for their support in the election campaign, Alexei Zabotkin, economist with United Financial Group said.


"However I think that the government will not trade social peace for profits of oil tycoons in a pre-election year," he added.