Searching for relevant national currency rate

Some SU HSE Experts are reading the tea leaves to clear up once more urgent financial issues for the Moscow News.

The rouble this week was hovering close to the Central Bank's latest line in the sand, 41 to the dollar, after the government has spent some $200 billion - one third of its international reserves - in managing the currency's decline against the dollar/euro basket in the last six months.

Most experts expressed some hope that the new trading floor would hold, but said a lot would depend on how long oil prices stay low.

Yevgeny Gavrilenkov, SU HSE professor, Troika Dialog group chief economist:

"In principle it is easy for them to keep the rouble at 41 against the basket. They have to stop lending roubles because the macroeconomic fundamentals mean they have to adjust the balance of payments to the oil price.

There is liquidity in the banking system but every day they inject more. A week ago it was still 800 billion roubles a day, although it is decreasing now. Liquidity was injected but banks lacked it because it went straight to the foreign exchange market. They need to raise interest rates to something that prohibits speculation, 20 per cent, 30 per cent, 1,000 per cent if necessary for a short period of time.

There is a need to adjust the currency to economic reality because the rouble was overheated in previous years on the back of high and permanently rising oil prices. It is back to what it was four years ago in real terms.

Ideally we need a floating ex­change rate, but as long as they keep lending money at a negative real interest rate it will be very difficult to find the bottom."

Martin Gilman, SU HSE professor and a former IMF representative in Russia:

"The government can protect the rouble in the short run. They have almost $400 billion in reserves to back up their exchange rate policy. However, they wouldn't want to throw all their reserves at the exchange rate.

It is critically important that the population does not panic because the greatest danger to the rouble is if the population has a run on it. In that respect, the Central Bank's policy of small step devaluations has been sensible as people have moved deposits into dollars.

The Central Bank can hold the rouble around 41 against the basket providing oil stays above $35. Below that they will have to expand the band. In the longer term if oil prices do deteriorate they should not even try to protect the currency.

Monetary policy should be tightened, which they have been doing over the last few weeks. If you can create a demand for rouble liquidity with higher interest rates this will discourage conversions into foreign exchange."

From the Moscow News.