Who Believes the Ruble Will Not Be Devalued?
by Evan Scott

Now that everybody says that the Russian ruble should not be devalued, and international experts have equated the strength of the ruble with the survival of Russian reform, stability, and ultimately peace with a nuclear superpower, who really believes it? International financial institutions, the Governments of the United States and Russia, numerous commentators, economists, financiers, sociologists, and other heavy thinkers, all seem to agree that the ruble must be propped up. But the fact is that Russian oil exports have declined by a third since last year. The world price of oil has fallen. Thus there are two choices: allow the ruble to devalue, in line with the reduced oil income of Russia, or continue to declare that Russia will fall apart if the ruble is devalued, and make the currency an even more juicy target for foreign speculators.

How many times have we seen this mistake made in the past? Why have officials of international institutions and western governments tied the future of reform in Russia to an overvalued exchange rate?   Russia is a large country that produces most of its own goods. The inflationary impact of an adjustment of the ruble would be minimal if the government did not give in to demands for compensatory wage increases. If Russia moved to a flexible exchange rate policy and indeed it turned out that the ruble has not been overvalued, any initial depreciation overshoot could be quickly reversed.

Compare this with the increasingly desperate measures to defend the current ruble exchange rate. The country's income has fallen and no one is predicting an increase in oil exports income anytime soon. The export surplus, until now, has been used in effect to pay for failure to collect taxes and the resulting explosion of government debts. Trying to maintain an artificially high exchange rate will only deplete the country's remaining foreign reserves, use up its lines of credit to international financial institutions, and force it to stifle recovery with an exhorbitant interest rate, which has now reached 80 to 100 percent.

This is folly on an immense scale. Who dares say that the emperor has no clothes?

The author is an international economist based in Washington D.C.