Back when “devaluation” was a whisper, Russian authorities scoffed at the notion. When it became a scream after months of financial turmoil, the officials tugged at their shirt collars but promised to stand fast.
Then, sometime in the last few days, devaluation jumped from an option to a mandate: Russia’s government and Central Bank acknowledged Monday that its battered ruble could not be defended at its current rate and would be allowed to float against the dollar.
That set off a desperate and often futile bid among some Russians to unload rubles at banks and currency exchanges. Those who found dollars paid a premium, with several currency houses buying dollars at a rate of 6.3 rubles but selling them for 8 rubles or more, even as high as 9.5 rubles.
Some experts predicted bank failures when institutions fail to come up with the funds to pay foreign debts. Some senior economic officials have resigned, and critics are calling for more to go.
The move to allow the currency to float, coupled with a plan to restructure some government debts and delay payment on others, is part of a last-ditch effort to avert an economic meltdown. The question is whether the action will work any better than other strategies Russia has tried or just heap more pain on consumers.
“The measures are tough and fairly radical,” Prime Minister Sergei Kiriyenko said. “They are unavoidable.” By the end of the year, the currency could be allowed to sink to as low as 9.5 rubles to the dollar from the 6.3 it started at Monday.
The government denied this amounted to a devaluation, but there were no delusions on the streets of Moscow. Stores closed early, and some Russians scrambled to unload their rubles.
For those who remember losing their life’s savings when hyperinflation ravaged Russia after the breakup of the Soviet Union, Monday’s announcement sounded familiar and ominous.
“This is what happens,” said Ludmilla, a cook who was buying bread and tomatoes at a Moscow market. “The government says what it wants, but for us it means that everything will cost more.”
Inflation is the demon the government dreads. Ever since the Asian financial crisis and falling oil prices teamed up late last year to hammer Russia’s investment climate and start its economy on the skids, the government has spent billions of dollars in currency reserves to defend the ruble.
Average Russians may have seen their standard of living slump through wrenching economic reforms, but at least Russia had won a stable currency and steady prices. Now, in a nation where more than half the consumer goods are imported, President Boris Yeltsin’s main economic accomplishment stands in jeopardy.
Most vulnerable are not the rich, many of whom have dollars stashed at home or in secret accounts abroad. Many of the poor will still scrape by on their meager pensions, state subsidies and what they grow in their garden plots.
Most vulnerable to the effects of the ruble’s fall is Russia’s would-be middle class, the people who have their eye on starting a small business or buying a computer or taking a vacation in Turkey.
Those with the most to gain from Russia’s economic reforms now stand to lose the most, and the Kiriyenko government is one example. The 36-year-old prime minister may impress the West and international investors, but he lacks broad support at home. Social unrest sparked by a wave of price increases could force Yeltsin to oust Kiriyenko and his reform team and fill their slots with Communists and other fans of state-run economies.
“This is just what we were saying, that this crash was coming,” said Nikolai Ryzhkov, a leading leftist in the lower house of parliament, where Kremlin opponents are lined up to crow. “What it will bring is countless disasters for the people.”
Avoiding potentially calamitous social and political upheaval was one goal the International Monetary Fund had in mind when it recently crafted an injection of more than $17 billion in new loans for Russia’s economy.
The IMF plan was twofold: give investors confidence that Russia’s markets would not collapse and buy the Kremlin some time to boost its tax collection, trim its budget deficit and restructure its crushing short-term debt. The confidence ran out after a few weeks.
New IMF installments of at least $2.8 billion are to be released in September, but critics of the bailout are sure to step up their complaints that Russia is a black hole for Western loans.
The government said Russia’s foreign debt payments would not be affected by Monday’s action. But it did set a three-month moratorium on payments of foreign loans by Russian banks and companies. It also said it would restructure some domestic debt and bar non-residents from investing in short-term, ruble-denominated securities.
This is not the type of thing a nation does to make itself more creditworthy. Yet the IMF, like the U.S., does not want to abandon Kiriyenko. Without the IMF’s billions, the Kremlin’s challenge of saving the ruble from a free fall and keeping Russia’s banking system and economy afloat would become only more daunting.
The IMF also must consider factors beyond Russia’s borders. The de facto ruble devaluation stung international markets, aggravating fears that other currencies also might be at risk–the Chinese yuan, for one. German equities and the deutsche mark are vulnerable because of German investments in Russia, particularly in banking.
In Moscow, there was no panic in the streets but plenty of confusion. Nearly everyone from fruit vendors to stock analysts admitted being baffled at how the changes will shake out.
Banks blocked customer access to dollar accounts and even withheld releasing dollar wire transfers. Stores selling big-ticket items closed early, at a loss as to whether to raise prices and by how much.
The banking crisis that led Russia’s bond and equity markets to seize up last week played a large role in Kiriyenko’s latest gambit, which Yeltsin approved during a meeting Sunday. With some banks unable to honor their debts or make good on certain currency contracts that require millions of dollars in cash, Russia’s entire financial system was in danger of collapse.
Now, the Kremlin and Central Bank are backing a restructuring that could cause hundreds of banks to fail. If the effort succeeds, Russia could emerge with a tighter, stronger and better-capitalized banking system. If the closings and consolidations spin out of control, however, a run on the system and wide-scale loss of consumer savings could result. Political repercussions also are expected. Alexander Livshits, a top Kremlin economic adviser, tendered his resignation Monday. Central Bank Chairman Sergei Dubinin reportedly is under pressure to resign.
