Russians Back Away From Talk of a Fixed-Rate Ruble

Critics say government lacks funds to back a fixed exchange rate

RUSSIAN officials, anxious to quell confusion caused by talk of introducing a fixed ruble exchange rate, have backed off initial proposals that left both foreign and Russian investors jittery.

Foreign businesspeople balked at an announcement by First Deputy Prime Minister Anatoly Chubais at the World Economic Forum in Davos, Switzerland last week that the government was considering pegging the Russian currency.

With inflation currently running at 16.4 percent per month and the ruble falling daily against the United States dollar, such a move would clearly be untenable. It would spawn a currency black market, enlarge trade deficits, and spur economic instability, say critical economists.

In a bid to calm investors, Economics Minister Yevgeny Yasin later made it clear that the rate would not be fixed too soon. ``To ensure that such an instrument has an effect, it has to be used in specific conditions. Prime among these is a relative stabilization of prices and of the market rate of the ruble, and we dont have these yet,'' he said on Monday.

Proponents of a fixed Russian currency say it would force the government to control its money supply, thus reducing the spiraling inflation rate and helping stabilize the economy. It would also lower interest rates and encourage both Russians and foreigners to borrow money to invest in Russian industry.

But critics say a pegged rate would soon become unrealistic, making Russian exports less competitive and leading to formation of a currency black market.

They also warn that a fixed rate could make the battered ruble plummet even further should Russia's hard currency reserves run out in trying to defend the ruble. Current reserves of an estimated $6 billion are only half the amount the International Monetary Fund (IMF) recommends.

A fixed ruble rate, ``if introduced when the inflation rate is lower and the Central Bank has adequate hard currency resources, is not so bad. Then the Bank could buy hard currency at a fixed price, and this would create a beneficial investment climate,'' says Mikhail Berger, chief economic columnist for the daily Izvestia.

``But to introduce a fixed rate now would be madness and stupidity, and would bring nothing but panic,'' he says.

MR. Chubais told reporters that ``a fixed exchange rate itself is the demonstration of the stability of the Russian economy and the Russian financial system. It will make the economic environment better than it is now for the foreign investor, both the portfolio and direct investor.''

The ruble, which has fallen sharply in recent years, on Thursday was trading at 4,078 against the dollar, down from Wednesday's rate of 4,059. In the Soviet era, one ruble was worth officially more than a US dollar.

Critics of the new proposal say it would just exaggerate the ruble's actual purchasing power.

Fixing the rate would be ``an absolutely senseless measure and a terrible mistake,'' says Nikolai Petrakov, director of the Institute of Market Problems and former chief economic adviser to ex-Soviet President Mikhail Gorbachev.

Analysts say the currency can survive long-term only if the government is able to draw heavily on considerable resources.

In particular, Russia hopes that it can fill its budget gap with money from sales of domestic securities and financing from a $6 billion ruble-stabilization fund and a $6.25 billion standby loan from the IMF, which has had a delegation in Moscow since Jan. 17 for talks expected to end this week.

The Washington-based multilateral organization has already lent Russia $4 billion. It says it will only make a new loan if Russian lawmakers approve a credible budget that will reduce inflation. But many fear the cost of Russia's military intervention in Chechnya - which has already reached an estimated $1 billion - has ruined that prospect.

One top Russian Finance Ministry official said Wednesday that the IMF could approve the credit by Feb. 9. Others said talks were deadlocked.

``Were the $6.25 billion IMF standby loan - linked to an additional $1.5 billion from the World Bank - to be refused, the damage would go far beyond a hole in Russia's budget,'' wrote Liam Halligan of the Moscow-based Center for Economic Reform in the Moscow Times this week.

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