Finance counsels

A ruble devaluation won’t solve Russia’s economic problems as the world’s largest energy exporter faces “a very difficult next couple of years,” said European Bank for Reconstruction and Development Chief Economist Erik Berglof.

“This is the wrong way to think about the recovery in Russia,” Berglof said in a Sept. 10 interview in London.

Russia’s failure to wean itself off its reliance on commodities has condemned the country to sluggish economic growth as it recovers from a record contraction, economists say. The central bank will struggle to fulfill its goal of easing the ruble into a free float by 2011 as long as the economy’s fate hinges on raw material prices, Berglof said.

“If you want to have a flexible exchange rate, you need to get out of this dependence on commodities,” Berglof said. “It’s a major concern that in the last 10 years Russia has become actually more dependent on commodities. Unfortunately, not much progress has been made.”

The Russian Association of Regional Banks, whose 450 members include the Russian units of Barclays Plc and Citigroup Inc., has called for a devaluation of as much as 30 percent. Billionaire Vladimir Potanin, owner of 25 percent of OAO GMK Norilsk Nickel, said the “interests of the economy” will lead the currency to depreciate in the “mid term,” allowing exporters to cut costs and modernize production, according to an interview published in Vedemosti on Sept. 7.

‘Right Objective’

The central bank managed a 35 percent depreciation in the second half of last year as a collapse of raw material prices pushed the economy into a recession. The bank, which wants to pursue an inflation target once it moves to a free floating currency, widened the ruble’s trading range to 26 to 41 against a dollar-euro basket in January.

A freely fluctuating currency “is absolutely the right objective,” Berglof said. “Russia should strive for a flexible exchange rate. The thing they need to do to have a flexible exchange is to build local currency markets, broadly speaking to develop local financial markets and get more diversified industries. Discussing what the right exchange rate could be is not a solution for Russia’s problems right now.”

The EBRD, one of Russia’s largest foreign investors, is working with the country’s government to strengthen non-oil industries and wants to invest in such companies, Berglof said free credit report and score. The bank sees the best potential in food-production, the chemicals industry and in consumer goods, he said. Most recently it loaned 21 million euros to a Turkish-owned bottling plant near St. Petersburg, and $40 million to cosmetics group OAO Concern Kalina.

Not the Answer

The EBRD invested almost 12 billion euros in Russia between 1992 and the end of March, equivalent to 28 percent of the bank’s total funding to the 30 countries it supports over the same period.

A collapse of economic output this year prompted the calls for a weaker local currency. Last quarter, gross domestic product declined a record 10.9 percent and the country’s exporters hope to tackle a decline in global trade through a weaker currency. They say this will help buoy an economic recovery. Berglof disagrees.

“Manufacturing exports are a small segment of the economy,” he said. “Achieving competitiveness through depreciation in Russia is not really the right strategy. It isn’t the answer to the issues of diversification and increasing international competitiveness.”

Contracting Output

Output contracted 9.8 percent in the first quarter, ending 10 years of expansion that averaged close to 7 percent fuelled by an oil-price boom. The cost of crude plunged by more about $100 a barrel from a record between July 2008 and December as the global financial crisis undermined demand for commodities.

The Economy Ministry on Sept. 9 raised its forecast for next year’s economic expansion to 1.6 percent from 1 percent. It expects the economy to shrink 8.5 percent this year. Economy Minister Elvira Nabiullina said on Sept. 9 output may grow 3.9 percent to 4.5 percent in the second half of this year compared with the first six months.

“We may see some stronger quarters now but the major declines are now rippling through the financial system and are affecting demand, unemployment,” Berglof said. “Russia will have a very difficult next couple of years. We don’t see rapid growth coming back any time soon.”

The ruble has traded close to the lower limit of its band against a basket of euros and dollars since the beginning of this year, with the rate averaging almost 38.

The currency last week posted the biggest weekly advance in more than three months as the price of oil rallied.

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