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Few See Ruble Repeating the Magic of 1998
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For Ali Guseinov, the 1998 ruble devaluation was not only a disaster -- it was also an important turning point.

When the currency lost two-thirds of its value in less than a month and Guseinov's customers could not return their debts, the Azeri native lost almost everything he had invested in his wholesale shoe business.

"Of $300,000, I recovered about $30,000," he said. "It was a nightmare."

For Guseinov, however, the nightmare did not last long. As the country's economy surged back over the next few years, powered in part by the cheaper currency, old customers slowly began returning their debts, and many new ones appeared.

Now, 10 years later and in the midst of another economic collapse, Guseinov is one of many businesspeople in Russia hoping that history will repeat itself.

"It's gotten difficult again, but I have some money on the side to reinvest in my business once things pick up," he said.

Most economists agree that the devalued ruble -- along with soaring oil prices -- was one of the initial drivers of the decade-long boom that followed the 1998 crisis. Whether the scenario will be repeated, however, is a different matter.

The 1998 devaluation came as a sudden, powerful shock, with the dollar exchange rate falling from 5.3 rubles to 21 rubles in a few weeks. This time, the Central Bank gradually widened the range it allows the ruble to trade in, giving businesses and individuals time to exchange their money.

Since mid-November, the ruble has fallen by one-third against a basket of dollars and euros that was introduced in February 2005 to help protect businesses from currency fluctuations. And while the devaluation may feel similar to its sharper precedent, other macroeconomic indicators -- an economy working closer to full capacity, heavier corporate debt and a sated consumer base -- make the chances for a speedy recovery murkier this time around.

"In 1998, you had a very different set of conditions at work," said Vladimir Tikhomirov, chief economist at UralSib. "The devaluation was much more dramatic, very sudden and very deep. People's incomes fell by 60 percent. And there was a great deal of unused productive capacity in the economy."

It was those sectors of the economy that were not producing up to their potential that stimulated the 1998 devaluation and subsequently helped the economy bounce back, he said.

"Today, these sectors are already at their full capacities," he said.

The earlier crisis and Russia's subsequent default also helped purge the economy of inherited Soviet-era debt and put an end to a system that was largely dependent on barter and other nonmonetary instruments, said Natalya Orlova, chief economist at Alfa Bank.

"It gave the government the opportunity to set the dials back to zero and start fresh," she said.

That fresh start, aided by skyrocketing commodity prices and the depreciated ruble, helped the country's gross domestic product jump to 10 percent growth in 2000, from a contraction of 5.3 percent just two years earlier, according to the International Monetary Fund.

Finance Minister Alexei Kudrin said earlier this month in a television interview that the recent devaluation would be "strong medicine" for the Russian economy, helping revive credit and liquidity within one or two months, but not all economists agree.

"There seems to be a consensus that the devaluation will eventually lead to something good, but I don't think there will be any benefit at all," Orlova said.

Russia is once again burdened with debt, she said, although this time it is companies, not the state, that owe money.

"And that debt is in dollars, not rubles," Orlova said.

A report in Japanese newspaper Nikkei earlier this month showed just how much rests on that debt. The paper quoted Anatoly Aksakov, president of a Russian regional banking association, as saying he had asked the government to broker talks with foreign lenders on restructuring Russia's $400 billion in corporate debt.

The story sent the euro plummeting, although it recovered somewhat after Aksakov clarified his remarks and two of Russia's top economic officials -- Kudrin and Arkady Dvorkovich, the Kremlin's chief economic aide -- said Russian companies would continue to service their debt as planned.

The 1998 devaluation drove up prices for foreign goods, making domestic production "much more competitive," said Martin Gilman, director of the economic policy center at the Higher School of Economics and a former representative of the International Monetary Fund in Russia.

"Just about any company that was producing goods for the domestic market benefited," he said. "Food producers, automakers, clothing, light goods -- they all made money."

The higher standard of living achieved in the last decade has also made the devaluation less likely to fuel a recovery this time around. Labor costs in Russia are now far greater than in China, for example, making Asian imports competitive even with the weakened currency.

Competing on quality might also prove difficult, as the consumer boom of the last decade has left many households well equipped with the big purchases that drive Russian industry.

"These days, many people already have a good car or a good television, and they're comfortable waiting until better times to get a new one," Tikhomirov said. "There's just no rush for goods like there was 10 years ago."

Nonetheless, there have been spots of hope. Gilman said he'd seen an investment bank's internal memo predicting plummeting imports in January, which could help domestic producers if it represents a turn to Russian products.

"The exchange rate is making foreign goods more expensive, so a shift to domestic goods seems like the next logical step," he said, pointing to the processed-food sector as one area where a cheaper ruble would play a particularly favorable role.

Imports rose 10.3 percent in December, according to Central Bank statistics. Numbers for January have not yet been released.

Tikhomirov also said consumer goods were poised to benefit. Even the beleaguered auto sector could eventually see its fortunes rise, he said, but only "later, once the situation stabilizes and people have more certainty about their jobs and incomes."

Heidi McCormack, president of General Motors Russia, which has its production facilities near St. Petersburg, said the devaluation would "of course be advantageous," but that it had a downside as well.

"We have some fairly significant inflation to deal with, and that's putting pressure on the entire system," she said.

Kudrin has said 2009 inflation could hit 14 percent, about the level that it reached last year. But even with the pressures of inflation, McCormack said, the stability of holding assets instead of fluctuating currency could draw consumers.

"In times like these, people want to have the value of their money tied up in something tangible, and a car is one of those things," she said.

If industrial output is any indicator, not everyone is expecting Russian consumers to sink their savings into assets. Output fell 20 percent across all sectors in January from the previous month, according to figures released last week, and the auto sector was producing 80 percent less than in January 2008.

Whatever the effects of devaluation will be, experts said they would only start becoming evident in the coming months.

"We should start seeing the true impact of devaluation in February and March," Gilman said.

By Ira Iosebashvili

Source >  The Moscow Times | 24 February 2009

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