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. Last Updated: 07/27/2016

Collapse Of Ruble Not Such Bad News




The collapse of the ruble last fall seemed to be the economic equivalent of the Chernobyl disaster. But while its rapid drop was destructive, there has been no Chernobyl-like fallout: The ruble is now worth a quarter of what it was before the crash - and this has been broadly recognized as a boon to the economy.


When the ruble dropped from 6 to the U.S. dollar to 16 in the three weeks after Aug. 17, businesses suffered massive losses. But eventually the ruble found stability at a lower rate, one that has arguably provided the greatest stimulus to Russian industry since the collapse of the Soviet Union.


Exports have surged, and the dollars earned from them stretch further than ever back in Russia. Imports - now expensive in Russia - have shrunk. The result is a widening trade surplus. To June of this year it was $14.8 billion, a more than 15-fold increase from the $900 million surplus posted for the first six months of 1998. Overall trade shrank, but imports shrank faster, dropping 46 percent.


That dramatic shift can only partially be put down to a revival of world prices for oil, a major Russian export. Most of it comes from the devaluation, which has helped Russian producers compete both at home and abroad.


With foreign competition priced out of the Russian market, sales have surged for domestic products, from beer to laundry detergent to cars.


Industrial output for the second quarter of 1999 was up 5 percent on a yearly basis, according to the International Monetary Fund. July industrial output was 11 percent greater than July 1998, according to figures released by the Russian government.


One side effect has been a significant improvement in tax collection - an almost unheard-of phenomenon in post-Soviet Russia. Through July, the government raked in 159 billion rubles in taxes ($7.2 billion), some 60 percent of an annual target of 266.7 billion rubles ($10.7 billion).


Such economic successes have some wondering if the ruble shouldn't have always been at 24 to the dollar, instead of a stiflingly high 6:1. Goldman Sachs, in a research paper published at the end of July, argues that Russia has been suffering from "Dutch disease" - a term coined to describe how an economy can become a victim of its own success.


The term comes from the 1950s experience of the Netherlands. When the Dutch found gas in the North Sea and began to export it, that drove the Dutch guilder up. Suddenly Dutch products couldn't compete abroad and imports were undercutting them at home.


Russia is also arguably overdependent on oil and gas exports. But the ruble was at 6 to $1 from 1995 to 1998 not because of oil sales, but because of a con scious decision - made jointly by Russian economic officials and IMF advisers - to put it there.


The rigid exchange rate policy began as an effort to restore confidence in the ruble in the wake of the October 1994 "Black Tuesday" crash, when the ruble lost more than a fifth of its value in a single day.


But over time, this policy changed from a means for creating economic stability to an end in itself.


Even as it pushed Moscow to utilize a crawling peg rate, the IMF was elsewhere reporting that such an exchange rate policy was utterly unsuitable for countries like Russia.


"The challenges facing countries may change over time, suggesting a need to adapt exchange rate policy to changing circumstances," reads an IMF report titled "Fixed or Flexible? Getting the Exchange Rate Right in the 1990s," published in April 1998.


If economic policy is based on the "anchor" of a currency peg, the burden of adjusting to external economic shocks falls largely on fiscal policy, the IMF report argues. The report adds that such fiscal policies must be flexible enough to deal with these shocks.


But in Russia, the Fund has ignored the advice of its own research desk. Even as it was advocating a harsh monetary policy of a ruble pegged at about 6 to $1, the IMF was also busy this decade recommending a rigid fiscal austerity in order to fight inflation.


The IMF has not taken up this contradiction, or otherwise renounced its previous policies as in error. Nevertheless, it now agrees that a fixed exchange regime does not work in Russia.


"Directors emphasized that Russia was best served by a flexible exchange rate policy under current circumstances," the Fund said in a news release issued July 28.


But even if the strong ruble ended as a curse, there were plenty of good reasons at the time for pursuing it.


"The government would not have been able to hammer down inflation without pegging the ruble to the dollar," said Boris Bolotin, a professor with Moscow's Institute of the World Economy and International Relations.


"I don't think you can blame anybody," said Francis Breeton, an economist with Lehman Brothers in London. "It is very difficult to choose a proper foreign exchange rate."


Some economists also caution against reading too much into the devaluation-led growth - which so far is just digging Russia out of the hole created by the devaluation-led financial crash. In a way, it seems the devaluation has merely returned Russia to the same situation it was in five years ago.


Even after this July's year-on-year surge, industrial output has only recovered to the level of December 1994. Monthly imports also have dropped back to 1994 levels, when they amounted to $3.5 billion to $3.7 billion, according to Yevgeny Gavrilenkov, deputy director of the Bureau of Economic Analysis, a Moscow-based research center.


Gavrilenkov also argues that the ruble at 24 to $1 is not that different from where it was in the period from 1992 to 1994 - back when inflation was roaring, and when the ruble - prior to being redenominated - was trading in the hundreds or thousands to the dollar.


"If you look at the ratio of money base and foreign exchange reserves, excluding gold, by mid-1999, the ruble has settled at where it stood back in 1994," Gavrilenkov said.


If that sounds depressing, the ever-upbeat Goldman Sachs sees a good side. Goldman researchers argue that major economic reforms are easier to push through in a growing economy and that, by devaluing, Russia has picked up a "get-out-of-jail-free card" - in the form of a second chance to go back and pursue the economic policies it should have the first time around.