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Foreign Exchange

Russia must devalue the rouble

Drip, drip, drip. The Russian authorities’ decision to keep allowing the value of the rouble to fall against a US dollar-euro basket through a series of mini-devaluations shows no signs of stopping.

On December 15, the central bank undertook a seventh such adjustment since mid-November after devaluing the currency by 1% against a basket that’s 55% US dollars and 45% euros. The move takes the cumulative rouble devaluation since mid-2008 to 11%.

Spooked by the ferocity with which Russia has become engulfed in the financial crisis, Moscow is hoping that its measures will bring a period of calm, especially to the foreign exchange market. The rouble has come under severe pressure in recent months, as nervous locals have rushed to change the currency into dollars.

The central bank’s plan A was to prop up the rouble by deploying its huge foreign currency reserves. Now it has signalled that it will not jeopardize its investment-grade rating by wasting more firepower. Last month, Standard & Poor’s became the first rating agency to downgrade the sovereign’s debt in a decade, largely because of the big decline in the country’s foreign-currency reserves. Since early August, they have shrunk by $160 billion to just under $440 billion.

Still the rouble continued to fall.

The problem is that the authorities’ plan B is not working either. The piecemeal steps that the central bank is taking are only exacerbating capital flight by signalling to the market that more similar moves will be made.

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