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3 Aug, 2009 06:34

Budget deficit gives rise to Rouble devaluation talk

Gloomy economic statistics and melting reserves are giving rise to fears of another Rouble devaluation, after the currency lost one third of its value earlier this year.

The Government allowed the Rouble to weaken significantly at the beginning of the year, adjusting the exchange rate as the oil price fell. Now the Rouble may yet face another wave of devaluation.

So far it's stayed within its trading band, but has gained 16% since February against the Euro-dollar currency basket. Some experts think the Rouble might lose up to a 1/3 of its value, with the government facing an $80 billion budget deficit, possibly being tempted to see devaluation as part of the answer. Deputy Finance Minister, Dmitry Pankin, says devaluation of the Rouble could add additional government revenues.

“All the reserve funds are denominated in dollars and it’s in the Finance Ministry's interest for the Rouble to lose its value. This can effectively produce billion of dollars worth of extra revenue for the government.”

But devaluation would risk fuelling Russia's already rampant inflation. And many in the government are wary of using it as a tool to address fiscal problems, according to Danila Levchenko, Chief economist at Otkritie.

“The government budget deficit cannot be addressed by devaluing the Rouble, it's traditionally used for the trade deficit. And by devaluing the Rouble the government deficit might only increase.”

The wide rouble trading band gives the Central bank some leeway in making large currency interventions. But analysts say that the bank still spends up to $2 billion on bad days like July 10, when the currency slumped over 2%.

For now, many in government and businesses don't see the economic sense of devaluation. But if it has to happen, economists want it to be quick and clean, in order not to waste Russia's dwindling reserves.