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. Last Updated: 07/27/2016

Central Bank, Officials Clash Over Sinking Ruble

As the ruble slides toward new lows, public debate is raging over whether to allow it to drop faster and force the economy to be more competitive at the cost of more pain for ordinary Russians.

On Tuesday, the currency edged nearer 31 to the dollar, hitting a weighted average 30.8949 in official early trade, a drop of some 2.5 percent this year in nominal terms. But sharp rises in inflation mean that in real terms the currency has been appreciating.

For the Central Bank, defender of the ruble, too rapid a decline revives the nightmare of the 1998 financial crisis. It fears that if it lets it go, it will again be at the expense of ordinary people, still haunted by ruble plunges of the past.

But proponents of a weaker currency argue that if the ruble stays high, the economy will be artificially protected and competitiveness further eroded.

"Now it is an issue of policy choice -- whether the government supports the ruble and therefore supports consumption and people's incomes or keeps the ruble weaker to stimulate production and competitiveness," said Yulia Tseplayeva, an analyst with ING Barings. "None of the choices are easy."

President Vladimir Putin's economic adviser, Andrei Illarionov, said in a nationally broadcast television interview last week that with economic growth sputtering, it was crucial to halt the ruble's real appreciation.

He estimated that the ruble had risen in real terms by almost 50 percent over the past three years because of inflation, and that has been eroding the competitiveness of the economy.

"Around three-quarters of the competitive advantage that we got from the ruble's [nominal] devaluation has been wasted," said Illarionov.

In a clear swipe at the independent Central Bank, he said that the policies of the past 18 months had kept the ruble too high.

"To get it back to its natural situation it should obviously be slightly devalued," Illarionov said.

Officials at the Finance Ministry -- anxious to boost budget revenues -- have also stepped into the fray, pushing too for a ruble rate that weakens more in line with rising inflation.

Inflation soared to three-year highs in January and threatens to exceed the government's target for the year of 12 percent to 14 percent.

But the Central Bank is unhappy with the public debate among officials over the ruble.

"When Finance Ministry experts say the ruble rate should be lower, they do not think how much they will have to pay for the currency, as if the year 2003 does not exist," Central Bank chief Viktor Gerashchenko told reporters recently.

That year is when Russia's heavy foreign debt payments are due to spike, though officials say they have managed to trim the figure by a few billion dollars to around $16 billion.

But analysts said the ruble had a one-way ticket south, with prices on the country's key export item, oil, stuck under $20 per barrel and the Central Bank hoping to build its foreign currency reserves.

The Central Bank has suggested it would prefer to see around $40 billion to $45 billion in its vaults. Reserves stood at $36.8 billion last week.