It is 10 years ago that Russia returned to economic growth after the collapse of the 1990s. It is also 10 years since Vladimir Putin, Russia’s premier, ascended to the pinnacle of power. His popularity has rested in large part on the good fortune of high oil prices. As Russia enters its first recession on his watch, his government cannot afford any serious mistakes in its most consequential economic decisions yet.
Exchange rate policy presents the most urgent challenge. As declining oil prices have dragged the rouble down, the central bank has tried to brake its fall. This effort has not come cheaply: about $200bn, a third of the central bank’s foreign exchange reserves, flowed out of its vaults in the past three months. The authorities found the price worth paying to prevent a repeat of 1998 when the rouble precipitously lost three-quarters of its value, the government defaulted on its debts and many Russians were ruined.
Still, the bleeding of reserves must stop, or it will haemorrhage until nothing is left. Much of the drained reserves benefited banks that borrowed roubles from the central bank itself in order to speculate against it. By committing to the current rouble floor, the central bank is setting itself up as a target for speculative attack. Hoping that oil prices will recover is no option; waiting will just make the losses larger and the eventual adjustment more painful. Russia should let the rouble float, stabilise its reserves and focus on fighting the recession and softening the impact on Russians of the rouble’s fall.
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