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Foreign Exchange

Russian roulette

In a bold but reckless ploy, for much of last year Russia's president Vladimir Putin sought to curb the appreciation of the rouble against the dollar by intervening in the market. But the strategy, designed to protect domestic producers against growing imports, backfired. Along with inflation, capital outflows revived, sparking off the mini liquidity crisis that hit several banks in the summer. Ben Aris reports.

Putin's plan to curb rouble appreciation backfires

THE KREMLIN was taught a painful lesson in economics this year after it meddled with exchange rates and nearly brought the Russian economy to a halt. A judo black belt, president Vladimir Putin pitted himself against the invisible hand of market forces and lost. Putin ordered the Central Bank of Russia (CBR) to weaken the rouble against the dollar to give domestic manufacturing some breathing space in its battle against rapidly increasing imports. Although the move did give some sectors a boost, Russia's ballistic growth halted and the economy began to stagnate by last summer.

By October the Kremlin had conceded defeat and the rouble was given its freedom. The economy looks as if it will bounce back, but Russia is still on a steep learning curve and is ill equipped to deal with the increasingly complex problem of managing its currency.

A mini-banking crisis and the onslaught on the Yukos oil company have been blamed for the slowdown but the financial system's wobbles are a symptom, not the cause, of Russia's spluttering recovery, and the destruction of the country's erstwhile most valuable company was always going to hurt the investment climate.

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