Install

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

. Last Updated: 07/27/2016

Banker Says No To Weak Ruble




Central Bank chief Viktor Gerashchenko fired back at the government Monday in the spat over exchange rate policy and said the bank would chart its own monetary course to make sure the ruble was not pushed lower.


"We're independent enough to make decisions ourselves," Gerashchenko told reporters as he left an investment conference Monday. He said recent calls by Prime Minister Mikhail Kasyanov for preventing the "unjustified strengthening" of the ruble had had little impact on the Central Bank.


The government recently lowered its average exchange rate prediction for this year from 32 to as low as 29.4 rubles to the dollar as the ruble has strengthened in recent months. The ruble has been boosted by the high export prices for oil and other commodities, and the Central Bank's requirement that exporters sell 75 percent of their export earnings for rubles. But Gerashchenko said the ruble was still depressed against the dollar.


The ruble showed no immediate reaction to Gerashchenko's statements.


As the government continues to search for ways to keep the economy on track for growth, Kasyanov has spoken out several times against a further strengthening of the ruble. Just last week he warned that excessive strength of the ruble could send the economy back to the disastrous state it was in just before the 1998 financial crisis.


Economists also warned Monday that a gain in the ruble might erase the competitive edge domestic producers gained in the wake of the 1998 devaluation and stop industrial growth before it has time to take root.


Gerashchenko tempered his previous direct contradictions to the government's calls by saying the ruble should be held at a predictable floating rate, but should not weaken enough to bar imports.


He said foreign currency and gold reserves f already at their highest since late 1997 at $20 billion f would continue to grow, and the ruble could strengthen to as much as 20 to the dollar and still reap strong profits for exporters.


"In principle that means the ruble rate is depressed. But that does not mean we should go full steam ahead and lower it to 20," he said in remarks following his address to Renaissance Capital's investment conference. "We should begin with one notion: If we say it is floating, it should float predictably without any sharp jumps."


Gerashchenko said: "It's clear why the government wants a weaker ruble f they want more ruble income for the budget."


Economists on Monday said that avoiding a further gain in the ruble was crucial for sustaining the economic growth seen since the financial crisis.


"One of the key risks Russia faces is an overly strong ruble," said Philip Poole, head of emerging markets at investment bank ING Barings. "To make the recovery sustainable, structural changes are important, but there is a great risk that an over-strong ruble next year will cut off growth before structural reforms have had a chance to be put in place and take effect."


However, in an early sign the government may have already bowed to the will of the Central Bank, initial drafts of the 2001 budget foresee an exchange rate of 32 rubles to the dollar f the same rate predicted for this year.


"That kind of targeted ruble rate could create problems," Poole said. It shows the government has already agreed to let the ruble strengthen to some extent, he said.


Even as the ruble gains against the dollar in nominal terms, monthly inflation is staying at fairly high levels. Inflation was up 20 percent year-on-year for April.


The Western world, meanwhile, is experiencing inflation of around 2 percent, Poole said. That means that if the ruble stays constant in nominal terms against the euro, then Russian goods are going to become more expensive in comparison with German goods, for example.


However, analysts said the government had to balance hopes that industrial growth would continue to be fueled by the competitive prices of domestic goods with its need to pay off hefty external hard currency debts next year. The weaker the ruble, the more it would have to spend on meeting those obligations.


The spat between the Central Bank and the government is typical in many other countries as banks focus on reining in inflation and stabilizing the currency, Poole said.


"But the timing in Russia is crucial. The economic recovery is so fragile that it is imperative Russian goods do not lose their competitive edge before structural reforms have a chance to kick in," he said.


"The Central Bank's focus on the real appreciation of the ruble before the crisis almost killed Russian industry in terms of its ability to compete with imports," Poole said.


Gerashchenko defended the Central Bank's record on restructuring the banking system in the wake of the 1998 collapse. International financial institutions have reproached the Central Bank time after time for doing little to close down illiquid banks and for propping them up with billions of rubles in stabilization loans instead. Gerashchenko, however, claimed the bank had cut through the odds to set up a legal framework for bank restructuring, create the Agency for Restructuring Credit Organizations, or ARKO, and take on the debts of insolvent banks to private depositors.


He also defended the bank's record on transparency, saying he had never been against revealing information to the State Duma. That statement went against the grain of Gerashchenko's penchant for putting a top secret seal on information on the bank's operations on the precious metals market and hard currency operations abroad.


He also trumpeted the Central Bank's success in stabilizing the ruble after the crisis and in boosting hard currency and gold reserves to levels equal to late 1997.


Gerashchenko said Russia was now in a position to pay off its foreign debts without further loans from the International Monetary Fund, and he said chances of obtaining these loans were "small."