The Ruble May Be Running Aground Again

When Buck Wiley, a Moscow-based American executive with Sun Group, found his Niva jeep stolen one snowy morning in December, he didn't know that Russia's tanking currency would add insult to injury. Wiley's theft insurance pays in rubles, and the ruble has been dropping even faster than usual in the past eight weeks. "The policy has lost almost 30% of its value since the car was stolen," he laments. The claim still hasn't been paid, and Wiley fears that by the time he gets the money, it'll hardly be enough to buy a bicycle.

With the memory of Black Tuesday still vivid in their minds--Oct. 11, when the ruble dropped 27% in just one day--Russians are understandably worried that their currency could crash again. Russian banks and speculators have been dumping rubles continually since early December, when Russian troops invaded the breakaway region of Chechnya. The ruble closed at 3,988 to the dollar on Jan. 24, even lower than during its October crash (chart).

SMOOTH DESCENT. Yet despite the costly civil war, creeping inflation, and uncertainty surrounding the 1995 budget, Russia will probably avoid monetary implosion. For one thing, bankers and currency traders say, the government is doing its best to prevent another crisis. "The government learned some painful lessons last October," says Victor L. Huaco, president of AIOC Capital, a brokerage in Moscow.

Most important, the Central Bank of Russia hasn't repeated its mistake of last autumn--propping up the ruble at an artificially high rate, then abruptly pulling out of the market. Instead, the bank has intervened regularly in the currency markets to keep devaluation smooth. In the first week of January alone, the central bank bought about $220 million worth of rubles. Officials also have raised bank reserve requirements and required banks to report open currency positions daily rather than weekly. As a result, traders anticipate that the ruble will continue to decline, but bit by bit. Says Miljenko Horvat, president of Citibank's Moscow office: "A gradual devaluation seems acceptable to most people."

Similarly, while monthly inflation has moved back up to 10.4%, from 4.6% in August, consistent tight credit makes it unlikely that Russia will return to the bad old days of 1993, when prices were soaring by more than 25% a month. The central bank has reined in money-supply growth, which should begin braking inflation later this spring. And traders are relieved that officials are alowing the ruble to reflect economic reality rather than maintaining it at an unnaturally high level. "The bank understands that it's healthier if devaluation and inflation run parallel," says Maarten L. Pronk, general manager of ING Bank's Moscow office.

PRESSURE COOKER. That's not to say the markets don't face turmoil. The biggest uncertainty is over the budget, which the Duma, or parliament, rejected for the second time on Jan. 25. Russia risks losing $12.7 billion in loans from the International Monetary Fund and other agencies if the IMF judges the budget to be inflationary. Without the foreign aid, the government would be forced to finance its deficit by printing rubles.

In that bleak scenario, pumping more money into Russia's economy could drive inflation to 30% a month and cause the ruble to nose-dive to 15,000 per dollar by the end of the year, say government officials. The central bank does not supply data on its reserves--but they're surely not sufficient to buy enough rubles to avoid a meltdown. And investors in government bonds would demand even higher interest rates. The 278 billion rubles' worth of 77-day Treasury bills auctioned on Jan. 25 bore rates of 300%.

Keeping the 1995 budget in bounds won't be easy. Besides the war on Chechnya, which could drain an estimated $1 billion to $4 billion from Moscow's coffers, the Duma has forced the government to agree to add 6.2 trillion rubles for defense, investment, and bureaucrats' salaries to the 1995 budget, drafted at 167 trillion rubles. Some members of the Duma are also pressuring the government to more than double the minimum wage, a measure that would cost 57 trillion rubles in 1995.

Even if these measures pass, however, international observers think the IMF will look the other way and grant the much-needed loans. In addition, the government optimistically hopes to raise 35 trillion rubles through Treasury bill auctions this year. So, unless the Duma sends the budget back to the drawing board, the markets can be expected to continue putting up with steady inflation and a declining ruble. That may be cold comfort to Buck Wiley, but it's better than another Black Tuesday.

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