Experts think gradual strengthening of the ruble may result in default worse than that of 1998 in Russia
The fist signs of coming default are already evident: the real inflation increased by 8 per cent over the nine months and the ruble rate got higher. It is no good to be proud of the strengthening ruble; indeed, dynamically developing countries aim at reduction of the currency rate. This guarantees wider privileges to national exporters, especially in high-end spheres. Experts who have developed a report on the subject “The investment climate and the ruble devaluation”, Vice-president of the Financial Analysts and Forecasters Society S.Morozov and Head of the Commission for Complex Expertise of Governmental Target Programs P.Zabelin, think the official currency rate of 50 rubles per dollar may help evade default. The report was delivered at the 7th All-Russian Forum “Bank security: present condition and development prospects” on October 20-22 and gave rise to stormy discussions.
Here are some paragraphs of the report.
Currency exported from the country over the past ten years makes up $205 billion. This is the sum Russian commercial banks have transferred abroad; money brought to Russia is mainly cash dollars. Thus, this is the sum with which Russia credited the western economy, particularly the American one, and incurred great losses at that.
Why has the money escaped Russia? The authors of the report touched upon the peculiarities of the Russian investment climate. Until October 1998, the ruble security was low and made up not more than 40 per cent. In June 1998, the ruble security fixed the lowest result of 24 per cent ($14.6 billion dollars). The dollar equivalent of currency taken out of the country in June 1998 made up $1.9 billion. That was the moment when the 1998 default began, although the authorities officially announced it only in August. The gold and FOREX reserves secured only cash finance; cashless rubles were almost unsecured which resulted in the default of June 1998 – January 2000.
The largest possible difference between the official ruble rate and the settlement dollar rate was registered in December 1999 (19 rubles per USD and 57.7 respectively). Then the situation started improving. In June 2003, the security of the total ruble emission (cash and cashless) reached the maximum showing of 81 per cent, but then another gradual decline of the security started and has reached considerable decline by the end of 2004. This may provoke another default. The security of the ruble dropped to 69 per cent as of October 1, 2004 at the time when the Central Bank's gold and FOREX reserve is increasing quickly.
The difference between the real and the actual dollar rates has increased. Today, the real settlement rate makes up 42.1 rubles per one dollar. The difference between the settlement rate and the Bank of Russia's official dollar rate (29.22 rubles per dollar) makes up about 13 rubles per dollar. In July 2004, the sum taken out of the country reached the equivalent of $3 billion 305 million (even more than during the 1998 default).
Today the ruble positions are stable while the ruble rate has reached the lowest limit. The same stable exchange rate of the Russian ruble was registered before August 1998 and at the beginning of the default in July 1998. The exchange rate was 5.6 - 6.16 rubles per dollar at that time.
Thus a conclusion can be made that stable ruble stimulates removal of capital from the country. At the end of the previous default in December 1999, the ruble got 4-5 times weaker and the exchange rate went up to 27-28 rubles per dollar. After that, currency removal dropped to the equivalent of $1.3 billion and even to $0.6 billion in January 2000. It is obviously unprofitable to remove currency from the country when the ruble devaluates.
To curtail removal of the capital, the official actual ruble rate of the Bank of Russia and the real ruble rate must be made equal. Indeed, over the six years after the default when the official actual exchange rate of the ruble approached the real settlement rate, the removal of capital from Russia reduced 2.6 times to $56.3 billion.
The authors of the report think that to attract capital to Russia, we should mind domestic producers and increase the export. Russia will have favorable investment climate if the official actual rate will be 48-50 rubles per dollar (15 per cent higher than the real settlement rate of 42.1 rubles per dollar). At that, the Bank of Russia's reserves must make up $75 billion to secure the ruble at the above mentioned rate.
Under these conditions, the whole of the bank system needs reforming: banks must import currency, perform large-scale crediting and investment. The report states that Russia will need 20-30 large credit and investment banks of the same level that Sberbank (Savings Bank) and Vneshtorgbank.
The authors of the report say ruble devaluation must take four years to avoid shock therapy. Today, the government in fact admits it cannot restrain the ruble with market methods. Minister for Economic Development German Gref thinks “the ruble rate will grow 22 per cent stronger by 2007”. According to his statement, by the year of 2008 the ruble will retrieve its position of 5-6 rubles per dollar fixed before the 1998 default. If so, the ruble mass securing will require over $500 billion of gold and FOREX reserves (6 times bigger than today). This is hardly likely even under any reasonable or unreasonable oil and gas prices.
This may mean financial collapse for Russia and the country may loose its political independence. So, the end of 2004 is the time when fundamental decisions concerning financial policy must be taken in this country.
Early in October 2004, the Bank of Russia's report stated that money outflow made up $11 billion over the nine months of the year (compare with $18 billion by 1997), and by the end of the year the country may even exceed the 1997 showing. Russia should switch to export-oriented economy and devaluated ruble. The country needs effective investment climate. We may follow the US’s way when after the Iraqi crisis America devaluated the dollar with respect to all currencies of the world except for the Chinese yuan, the authors of the report conclude.
The government is unlikely to take such drastic measures. Analysts say, today Russia has no considered and consistent money policy. On the one hand, people dislike the high inflation rate, want stable future and strong ruble. On the other hand, the ruble is getting stronger too quickly which may provoke another default and restrict opportunities of Russian exporters.
The authors of the report say the epoch of oil and gas oligarchs is over in Russia. The West does not need Russia as a source of natural resources any longer. Russia must open up export of modern technical products; this in its turn requires thorough governmental reforming, more effective management and a new vertical of power.
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