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Financial Times (UK)
June 23, 2003
Russians learn to love the rouble

President Vladimir Putin was asked last month which currency he preferred: the dollar or the euro. Mr Putin quipped that he preferred the rouble.

His answer was more than a patriotic boast; it was a reflection of Russian public sentiment.

Vadim Ignatov, who sells traditional Russian dolls with the image of the president in Moscow's Sparrow Hills, agrees with Mr Putin: "It is a hassle to change dollars or euros. I'd rather be paid in roubles."

This is a dramatic turnaround for a country where the dollar has been the undisputed currency of choice for the past 10 years. "For the first time in Russia's history the rouble is becoming more attractive than the dollar, at least in the short term," says Oleg Vyugin, deputy chairman of the Central Bank.

The main reason for this reversal is the appreciation of the rouble against the weakening dollar and growing confidence in the Russian economy.

"The rouble has not yet reached its fair value mark and while we are still buying dollars to prevent a sharp increase in the value of the rouble we think that gradual appreciation of the national currency is in Russia's long-term interest," Mr Vyugin said.

The rouble appreciated by almost 4 per cent in nominal terms against the dollar in the first four months of this year and economists estimate it could rise another 3 per cent by December.

Distrust of the banking system, government policies and the local currency left the stash of dollars under the mattress by far the most popular way of saving money. Natalia Orlova, chief economist at Alfa Bank, estimates that $30bn is kept privately.

Last year banks saw a 44 per cent increase in dollar deposits, but in the past few months both private and state owned banks have registered a sharp increase in rouble deposits. "From the start of this year rouble deposits are growing faster than dollar-denominated deposits," says Ms Orlova.

By far the most significant factor in the rouble appreciation has been the reversal of capital flight. "For the first time in post-Soviet history we are seeing a net inflow of private capital. This is not to say that capital flight has stopped. But more money is now coming in than leaving the country," says Mr Vyugin.

According to the central bank's figures, there has been a net private capital outflow of $1.2bn in the first quarter of this year. But the bank expects a net inflow of $2bn in the second quarter.

Al Breach, chief economist at Brunswick UBS Warburg, estimates the net inflow of private capital at $5bn-$6bn in the first five months of this year, compared with a net capital outflow of $13bn last year and $19bn in 2001. "This is a hugely significant development which should stimulate further foreign direct investment and become one of the main drivers of economic growth in Russia."

Alexei Kudrin, Russia's finance minister, said the appreciation of the rouble presented a new challenge for the government's macro-economic policy. "Our task is to keep real appreciation of the rouble within boundaries of 4-6 per cent this year and 2-4 per cent in the following years."

The appreciation of the rouble is positive if it is driven by economic restructuring and economic stability. But is a dangerous sign if it is the result of high oil prices, Mr Kudrin said.

It is already putting pressure on Russian producers, however. "The weak rouble has been a strong driver of Russia economic growth in the aftermath of the financial crisis in 1998. The strengthening of the rouble will have the opposite effect," says Roland Nash, chief economist at Renaissance Capital.

Economists argue that an increase in competitive pressure will stimulate productivity growth essential for the restructuring of the economy.

Mr Vyugin says the period when import substitution was a driver of economic activity has passed.

Mr Breach says the productivity of Russian companies has increased 12 per cent in the first quarter of this year against the same period last year.

Mr Breach says: "Spending power in Russia is growing, and the time when you bought a Lada because it cost only $2,000 is over. Russian car manufacturers will either have to form joint ventures with foreign companies or go the wall. And the sooner this happens the better for the economy. Russia is the land of the fittest."

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