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HOW WILL THE RUBLE STABILIZATION FUND WORK?

 HOW WILL THE RUBLE STABILIZATION FUND WORK?
 FRANKFURT, Germany, June 4 /PRNewswire/ -- While the


stabilization fund for the Russian ruble demonstrates the west's support for Russia's economic transformation, the fund's efficacy hinges both on the success of domestic economic reforms and on resolving numerous technical questions, writes Deutsche Bank Research in its latest issue of Focus Eastern Europe.
 Full convertibility is not possible under current conditions, according to DB Research. The transition should take place gradually, beginning with conversion for current transactions and possibly for profit repatriation. Finding the "correct" exchange rate, the institute notes, may only be possible after a period of several months during which the rate may be exchanged accordingly. At the moment, Russia appears to be seeking a fixed parity rate for the ruble within a fluctuation band of plus or minus 7.5 percent.
 The ruble should become fully convertible only after confidence grows in the currency among Russians and foreigners, the institute writes. To achieve this, the Russian Republic must realize both internal and external monetary stability. The price reform of earlier this year was an important first step, but price liberalization must continue in other sectors of the economy, particularly the energy sector.
 The most important conditions laid out by the International Monetary Fund for establishing the ruble fund include: reducing the budget deficit to 5 percent of GNP, a sharp curtailing in the rate of money supply growth, and a unified rate against the U.S. dollar.
 In addition, according to DB Research, cuts in state subsidies to uncompetitive firms and the break-up of large production conglomerates must be carried out both to promote realistic prices throughout the economy and to enable the government to meet IMF conditions. To date, less than 1 percent of the Russian economy has been privatized. The Russian central bank, the institute notes, cannot continue granting large credits to unprofitable enterprises.
 At the end of 1991, DB Research points out, with a budget deficit at 20 percent of GNP and economic output down 14 percent, rampant money supply growth and an increasingly unrealistic exchange rate encouraged capital flight.
 DB Research also notes that it is still unclear how the mechanics of the fund will operate. Decisions must still be made on: whether the fund will stabilize a fixed or a flexible exchange rate regime; whether broad or narrow bands will be employed; and who will have the authority to decide when to intervene with funds to support the ruble.
 DB Research estimates that, based on the current figure of $30 billion spent on imports annually, the "cushion" of $6 billion going to the ruble stabilization fund provides an import-coverage ratio of 2.5 months. The institute considers this appropriate by international standards.
 Full convertibility, Deutsche Bank concludes, will contribute to integrating Russia into the world economy on the basis of market principles, introducing Russian companies to world market prices and the price incentive system while at the same time attracting more foreign investment. In light of these goals, and the precariousness of reforms made to date in Russia, the institute urges continued intensive preparation domestically and the imposition of strict conditions before any funds are actually granted.
 For the complete text, contact Ute DeFarlo, vice president, communications, TransAtlantic Futures, Inc., Washington, D.C. Tel: 202-462-1222; Fax: 202-462-1229.
 -0- 6/4/92
 /CONTACT: Andreas Gummich for Deutsche Bank Research in Frankfurt, 011-49-69-71007-217/ CO: Deutsche Bank Research ST: IN: FIN SU:


KD -- DC010 -- 6967 06/04/92 10:28 EDT
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Date:Jun 4, 1992
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