Russia Faces Dilemma Over Pace Of Rouble Slide

["Ulhas Joglekar" <joglekarulhas@xxxxxxxxxxx>]

The Financial Express

February 27, 2002

Russia Faces Dilemma Over Pace Of Rouble Slide

Moscow, February 26: As Russia’s rouble slides towardsnew 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 per cent 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 Russian rouble, too rapid a decline
revives the nightmare of the 1998 Financial crisis which savaged the economy
and dragged millions of Russians back into poverty.
It fears that if it lets it go, it will again be at the expense of ordinary
people, still haunted by rouble plunges of the past.
But proponents of a weaker currency argue if the rouble stays high, the
economy will be artifically protected and competitiveness further eroded.
“Now it is an issue of policy choice — whether the government supports the
rouble and therefore supports consumption and people’s incomes or keeps the
rouble weaker to stimulate production and competitiveness,” said Yulia
Tseplayeva, an analyst with ING Barings.
“None of the choices are easy,” she added.
The Russian economy recovered strongly from near collapse in 1998, but
energy-dependent growth paused late last year after a slump in oil prices,
dragging exchange rate policy into the limelight.
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 rouble’s real appreciation.
He estimated that the rouble had risen in real terms byalmost 50 per cent
over the past three years because of inflation and that has been eroding
competitiveness of the economy.
“Around three quarters of the competitive advantage which we got from the
rouble’s (nominal) devaluation has been wasted,” said Illarionov, widely
seen in Russia as an economic liberal.
In a clear swipe at the independent central bank, he said that the policies
of the past 18 months had kept the rouble too high.
“To get it back it to its natural situation it should obviously be slightly
devalued.”
Officials at the finance ministry — anxious to boost budget revenues — have
also stepped into the fray, pushing too for a rouble rate that weakens more
in line with rising inflation.
Inflation, which soared to three year highs in this January and threatens to
exceed to government’s target for the year of 12-14 per cent.
But the central bank is unhappy with the public debate among officials over
the rouble, fearing that too fast a fall could trigger a repeat of the 1998
currency crises which brought the Russian economy to its knees.
“When finance ministry experts say the rouble rate should be lower...they do
not think how much they will have to pay for the currency, as if year 2003
does not exist,” the chief of the Bank of Russia Viktor Gerashchenko told
reporters recently.
— Reuters

© 2002: Indian Express Newspapers (Bombay) Ltd. All rights reserved
throughout the world.