The full convertibility of the ruble is a dramatic transformation of a currency that was devalued 70 percent in as recently as 1998, after the government defaulted on $40 billion of domestic debt, plunging the economy into a financial crisis and wiping out the value of millions of peoples’ savings. Despite all these fiscal troubles its partytime for Ruble. There are variety of reasons for this, and some of them are critical particularly when Russia remains an honorable member of the “BRICK” club along with Brazil, India, China and Korea.
• Since Russia wants to be a prominent “card carrying” member of the G-8, a convertible ruble is a symbolic step, as much political as economic, as the currencies of the other members of the group have been fully convertible for long.
• The economy, too, has made a strong comeback since the chaos of 1998, thanks to a sharp rise in the price of oil and gas, Russia’s principal resources and exports, and also to a strong leadership, altogether different from President Yeltsin.
• The current account surplus last year was 11 percent of GDP, and reserves, at $250 billion, exceed two years’ imports-these reserves are over and above a $70-billion “stabilization fund” built out of windfall oil tax revenues
If there is one dark cloud, it is inflation running at 10 percent a year. While President Vladimir Putin has expressed hope that the convertible ruble would soon become a “reserve currency” for the world’s central banks, the exchange rate will continue to be managed with reference to a basket consisting of the dollar and the euro. (In that case, why should any country keep reserves in the ruble? One might as well put the money in the more familiar dollar and euros, which have much deeper, and liquid bond markets.) But the monetary policy focus may shift from management of the exchange rate to interest rate management
Another symbolic move by the Russian government, just a few weeks ahead of the G-8 summit, was an agreement with the Paris Club (an informal group of cross-border government creditors) to pay off the remaining official debt of $22 billion ahead of schedule
Putin would obviously need all the political prestige and weight he can muster while dealing with the summiteers, who were all much more comfortable with his predecessor. For the West, a chaotic, weak Russia under an erratic president, was much more pliable than a strong, confident nation led by Putin. While he is hardly likely to go back to the days of central planning, he has made his preference for state control of the “commanding heights” of the economy clear, and this includes oil and gas, railways, airlines, metals and so on
While he has not re-nationalized the huge public sector companies sold by his predecessor at throwaway prices, creating a dozen multi-billionaires (oligarchs) overnight, he has clearly shown that while they may enjoy their riches, any attempt at political interference will not be tolerated. He made an example of Mikhail Khodorkovsky, one of the oligarchs and the boss of Yukos, the giant oil company, by prosecuting him and the company for tax evasion totaling $28 billion. Even as Khodorkovsky is in jail, the best assets of Yukos have been auctioned for payment of the tax dues, and taken over by state-controlled companies, in particular Rosneft, whose IPO in London coincided with the G-8 summit. The 500-page prospectus included a 25-page list of the risk factors, including Rosneft’s vulnerability to legal claims arising from the takeover of Yuko’s assets. The prospectus also acknowledges that as a government-controlled company, it may be required “to engage in business practices that do not maximize shareholder value”. No wonder at the book building price range, Rosneft is being valued at a 40 percent discount to its “fair value”, that too based on an oil price of $50 a barrel (the current spot price is $70 plus).
As for as Ruble is concerned definitely it has a positive side if the Russian monetary policy is proactive.
(Mohammed Habeebulla is a management consultant. He is based in Jeddah.)