WILL THE RUBLE HOLD?

On December 5, Russian financier Boris Berezovsky called for the ruble to be allowed to devalue by up to one quarter – to 7,500 rubles to the dollar, for example – in order to lessen the squeeze on Russia’s financial markets. Berezovsky was firmly rebuffed by First Deputy Prime Minister Anatoly Chubais and Central Bank chair Sergei Dubinin. (Kommersant -daily, December 6)

On December 1, the Central Bank broadened the ruble corridor to 84 points (formerly it was 24 pints wide), and raised the upper limit from 5,926 to 5,963 to the dollar. The rate immediately moved to the new ceiling. Throughout the week Dubinin reaffirmed the bank’s intention to defend the ruble and to keep it within the announced limits — which are set at 5,750 to 6,350 rubles to the dollar until December 31, 1997. Dubinin has also ruled out the possibility of introducing capital controls, and has pledged further liberalization of capital flows in 1998. (Izvestia, December 5)

The Central Bank had been spending up to $150 million a day defending the T-bill and stock markets, but last week it decided to abandon those markets and concentrate on holding the ruble exchange rate. The Bank has spent at least $3 billion of its $21 billion reserves defending the ruble in recent weeks. Demand for dollars on the interbank market rose from $125 million on December 1 to $176 million on December 3, while yields on treasury bills climbed to 45 percent. The situation seemed to ease on December 4, when T-bill yields eased to 30 percent and stock market prices, which had fallen 40 percent since their October peak, rose 8 percent. It looks as if the Central Bank will succeed in its strong ruble policy, although the cost in terms of financing the government deficit and discouraging industrial investment will be considerable. The Central Bank raised the refinancing rate from 21 per cent to 28 per cent on December 1: ING Barings calculates that every percentage point increase adds $640 million to the government’s annual debt service costs. (Financial Times, December 5)

Although the ruble first strategy is putting intense pressure on Russian commercial banks, the likelihood of a full-scale bank crisis, or a collapse of some major banks, is slim. In a sense, the banking system has been permanently in a crisis of sorts for the past several years, with the Central Bank raising reserve requirements and bank lending (to borrowers other than the government) shrinking to a trickle. It is not as if the banks have extended massive loans to commercial borrowers who will now default because of the hike in interest rates, which has been a key factor in currency crises elsewhere in the world.

Menatep