MOSCOW, Aug 17 (AFP) - Russia's de facto ruble devaluation
announced Monday exposes the country to immediate political and
economic turmoil, but could prove the only way to solve the
country's stubborn economic problems in the long run, analysts said
Monday.
Economists, political scientists and market players all said the
move to relax the tight corridor around the ruble was tantamount to
a devaluation which could touch off inflation, the implosion of the
banking sector and panic on the streets.
On a broader political level, the move could severely tarnish a
government which has hung its reputation on the ruble peg, and
discredit the reformist camp with critical parliamentary, not to
mention presidential elections, looming.
But the more obvious effects of the de facto devaluation, in
which the government said it was prepared to let the ruble slide as
low as 9.5 to the dollar this year from a fixing last Friday of
6.29, will quickly be felt on the streets of Moscow and other
Russian cities, analysts said.
Imported goods, which account for some 50 percent of consumption
in Russia, will automatically become more expensive. In Moscow, the
figure is an even more punishing 90 percent.
"In the short-term, the measure could have a negative impact,
even on production," said Gerald Wild, a Paris-based economist. "By
raising the cost of imports, which are also intermediary goods,
(devaluation) will raise the cost of the engine for growth."
Analysts said the surprise move Monday was forced on a
government painfully sandwiched between its own inability to balance
its books and a brutal but inevitable market response.
With the central bank spending billions of dollars of its
dwindling reserves, and interest rates and bond yields soaring to
vertiginous heights, the broke government had nowhere else to turn,
and nowhere to hide from the blunt market verdict.
The elastic snapped Monday morning. The government and central
bank unhooked the ruble from the narrow peg, and said it would be
allowed to crawl lower within a wider exchange rate band. The market
and street dealers responded by marking the currency down between 15
and 25 percent of its value.
The immediate risk is a banking sector implosion, analysts
agreed.
"The banking sector could suffer quite severely because of their
loans and their positions," said Peter Westin, an economist with the
Russia-European Centre for Economic Policy."
The vast majority of banks, up to their necks in currency
exchange forward contracts and with vaults full of increasingly
worthless government debt paper, risk going to the wall.
As well as the ruble manoeuvre, the government also said it
would recalibrate its debt in line with the new ruble-dollar rate,
and suspended trading until such restructuring had been announced.
This move runs a huge risk of alienating a foreign investment
community already extremely sceptical about channeling funds into
Russia because of overriding fears over the government's fiscal and
financial responsibility.
And yet in the long run, the Russian economy, long since
wheezing under the constraints of a tight ruble-dollar peg and
punished by the knock-on effects of the Asian financial crisis and
sagging global oil prices, could still gain from the rejection of a
policy which has tackled few of the country's fundamental economic
problems.
"It's the state opting in favour of Russian citizens and
national producers," said Central Bank chairman Sergei Dubinin and
Finance Minister Mikhail Zadornov of the government's manoeuvres
Monday.
"The money in circulation should be in the real sector and
support the interests of Russians," they said.
Russia's six-year monetarist battle to conquer inflation and
secure a strong currency has bled the so-called 'real sector' dry,
resulting in a startling economic contraction.
Inflation may have dropped to just 11 percent in 1997, but last
year's 0.4 percent growth in gross domestic product could not
disguise the painful truth of economic transition in Russia: output
now is barely 40 percent of 1989 levels.
Economic stagnation has continually sapped at revenues to the
budget, saddling the government with exponential levels of debt,
ultimately spooking the market, draining confidence and capital from
the country and giving the state few other options.
"Russia needs growth more than (financial) stability," said one
western economist.
"The government has finally recognised the reality of the
situation," added Marina Ionova, head of research at Aton Capital, a
Moscow financial group. |
