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24 Dec, 2008 20:19

President calms fears as Rouble slumps to new low

The Rouble has hit a 3 year low against the dollar – losing an additional 1% on Wednesday. But President Dmitry Medvedev is calming fears over the Russian currency's dramatic fall.

Neither an analyst, nor fortuneteller….

Dmitry Medvedev says he cannot foresee when the current financial downturn will be over. But he promises there will be no default in Russia, and no drastic changes in the economy. Even the Rouble devaluation will be slow and predictable according to the President.

“The Rouble rate should reflect the state of our economy. We have to support it. At the same time it should be a bit more flexible than it was before. This is needed in order to prevent economic problems inside the country. But whatever is going to be done, will be done openly, and it will not lead to people losing their money. It won’t be as it was in 1998, when the government took certain decisions and the next morning people woke up robbed.”

The Central Bank has burnt through tens of billions of dollars defending the value of the Rouble and is maintaining a step by step depreciation by broadening its trading band against a basket of other currencies.

Evgenny Gavrilenkov, Chief Economist at Troika Dialog, believes this approach is harming the economy.

“When investors and banks see that central banks devalue the currency by one to one and a half per cent a week, which means more than four per cent a month – or annualized it should be around 70 per cent. It means that the most profitable business in this country is just to convert all available roubles into dollars or any other currency. You don’t have to make any thing, make any effort. You don’t have to lend money to other banks. You don’t have to lend money to the real economy. It suppresses economic skill and kills economic growth.”

Other experts say, sharp devaluation would kill off about 30% of Russian banks and no less than 10% of enterprises.