RUSSIA’S PROBLEM: TOO MANY DOLLARS?

The greatest threat to Russia’s short-term economic prospects may now be too many dollars, rather than too few. After averaging US$5.7 billion during the first three quarters of 1999, average monthly exports rose to US$7.4 billion for October 1999-January 2000. The US$9.3 billion in export receipts reported in December were the largest monthly total recorded during the 1994-1999 period. Oil prices had a great deal to do with this: The average price reported for a ton of Russian exported crude oil rose from US$61 during the first quarter of 1999 to US$156 in the fourth quarter. Thanks largely to these export trends, Russia’s average monthly trade surplus doubled over the course of 1999, rising from US$2.0 billion in the first quarter to US$4.0 billion in the fourth quarter of last year. And preliminary data show a US$4.2 billion trade surplus in January.

Because exporters must sell off 75 percent of their foreign exchange earnings within three months of receipt, these trade surpluses have pushed unprecedented amounts of dollars onto Russian foreign exchange markets. To be sure, many of these dollars go just as easily as they came, thanks to Russia’s ever-present capital flight. But as the growth in the CBR’s foreign exchange reserves shows, ever greater amounts of foreign exchange are making their way into the Russian financial system, and staying there.

These inflows are posing some difficult and somewhat unexpected problems for the CBR. If the Central Bank ignores the inflows of foreign exchange, the ruble’s appreciation could accelerate sharply. This would damage the competitiveness of Russian exports, and deprive domestic producers of the protection from imports thus far afforded by the weak ruble. Both the CBR and the government seem to view such a rapid appreciation as undesirable. The inflows could in principle be sterilized: that is, Moscow could raise interest rates on short-term government debt, in order to convince holders to sell dollars and buy treasury bills. However, the August 1998 financial collapse destroyed the government debt market, and left the CBR and the government without the short-term instruments needed for sterilization.

As a result, a third option–intervention to purchase foreign exchange–has emerged as the CBR’s policy of choice. These purchases are apparent in the rapid growth in the CBR’s reserves, which have risen from US$11.5 billion at the end of November to US$15.0 billion as of mid-March. The risk to this approach is that it can result in rapid growth of the domestic money supply. After contracting sharply during most of 1998-1999, the monetary base (cash in circulation plus commercial bank reserves held by the CBR) during December-February grew by some 15% in real terms. Another sharp increase seems likely to have occurred in March, since the monetary base grew from 307.2 billion rubles on February 28 to 323.3 billion rubles as of March 20.

While this monetary growth is fueling Russia’s expansion, it could also be setting the stage for more inflation in the future. The fiscal burden associated with the war in Chechnya, as well as President Putin’s pre-election promises–which among other things include a March 21 decree ordering a 20 percent pay hike for all public-sector employees–suggest that Russia’s hard-earned fiscal and monetary stabilization will be put to the test in the coming months.

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