A V Rajwade: A fully convertible rouble

WORLD MONEY

It's a symbolic step, as the currencies of the other G8 countries have been fully convertible for long.

At one time, our media used to be full of reports and articles about Russia, its foreign and economic policies, our trade and so on. At that time, of course, it was not called Russia but the Soviet Union. Lately, Russia does not seem to be getting much attention from our print or, indeed, the proliferating electronic media. In a way, this reflects the lower geopolitical status of Russia, no longer regarded as a superpower. But, it remains an honourable member of the BRIC club, which is projected to power the world economy by 2050, along with Brazil, India and China. Last week, Russia made its currency, the ruble, fully convertible, and is chairing the Group of Eight Summit in Moscow, later this week. (The G8 consists of a group of major industrial democracies, including the US, Japan and Germany). More or less simultaneously, Rosneft, the Russian oil major, is floating its $10-12 billion IPO in London and Moscow, undeterred by all the controversies about how Rosneft came to acquire its oil and gas reserves.

The full convertibility of the rouble is a dramatic transformation of a currency that was devalued 70 per cent in as recently as 1998, after the government defaulted on $40 billion of domestic debt, plunging the economy into a financial crisis and wiping out the value of millions of peoples' savings. There are various reasons underlying the step:

Since Russia wants to be a prominent "card carrying" member of the G8, a convertible rouble is a symbolic step, as much political as economic, as the currencies of the other members of the group have been fully convertible for long.

The economy, too, has made a strong comeback since the chaos of 1998, thanks to a sharp rise in the price of oil and gas, Russia's principal resources and exports, and also to a strong leadership, altogether different from President Yeltsin.

The current account surplus last year was 11 per cent of GDP, and reserves, at $250 billion, exceed two years' imports""these reserves are over and above a $70-billion "stabilisation fund" built out of windfall oil tax revenues.

If there is one dark cloud, it is inflation running at 10 per cent a year. While President Putin has expressed hope that the convertible rouble would soon become a "reserve currency" for the world's central banks, the exchange rate will continue to be managed with reference to a basket consisting of the dollar and the euro. (In that case, why should any country keep reserves in the rouble? One might as well put the money in the more familiar dollar and euro that have much deeper and liquid bond markets.) But the monetary policy focus may shift from management of the exchange rate to interest rate management.

Another symbolic move by the Russian government, just a few weeks ahead of the G8 summit, was an agreement with the Paris Club (an informal group of cross-border government creditors) to pay off the remaining official debt of $22 billion ahead of schedule.

Putin would obviously need all the political prestige and weight he can muster while dealing with the summiteers, who were all much more comfortable with his predecessor. For the west, a chaotic, weak Russia under an erratic president, was much more pliable than a strong, confident nation led by Putin. While he is hardly likely to go back to the days of central planning, he has made his preference for state control of the "commanding heights" of the economy clear, and this includes oil and gas, railways, airlines, metals and so on.

While he has not re-nationalised the huge public sector companies sold by his predecessor at throwaway prices, creating a dozen multi-billionaires (oligarchs) overnight, he has clearly shown that while they may enjoy their riches, any attempt at political interference will not be tolerated. He made an example of Berezovsky, one of the oligarchs and the boss of Yukos, the giant oil company, by prosecuting him and the company for tax evasion totalling $28 billion. Even as Berezovoky is in jail, the best assets of Yukos have been auctioned for payment of the tax dues, and taken over by state-controlled companies, in particular Rosneft, whose IPO in London coincides with the G8 summit. The 500-page prospectus includes a 25-page list of the risk factors, including Rosneft's vulnerability to legal claims arising from the takeover of Yukos assets. The prospectus also acknowledges that as a government-controlled company, it may be required "to engage in business practices that do not maximise shareholder value". No wonder at the book building price range, Rosneft is being valued at a 40 per cent discount to its "fair value", that too based on an oil price of $50 a barrel (the current spot price is in excess of $70).

Email: avrco@vsnl.com