Experts advise Russia, Ukraine and Kazakhstan to move toward free float

PanARMENIAN.Net - Russia, Ukraine and Kazakhstan should abandon their currency management regimes and move toward a free float like nearby Armenia to protect their economies against the global credit crisis, Commerzbank AG and UBS AG said.



Armenia devalued the dram 22 percent against the dollar during the past two days as part of a $540 million credit-line agreement with the International Monetary Fund. The move will help reignite the "struggling" economy, Central Bank chief Artur Javadyan said.



Russia undertook what the central bank described as a "gradual devaluation" of the ruble, spending 36 percent of its foreign-currency reserves to curtail a 35 percent depreciation versus the dollar since August. In Ukraine, policy makers have drained 24 percent of reserves since August to stem a 41 percent drop in the hryvnia with "daily" interventions, according to the CB.



"Armenia has done better than all the others by moving straight to a free float," said Michael Ganske, head of emerging-markets research in London at Commerzbank, which ranks itself among the 10 biggest traders of the ruble worldwide. "It gives them the flexibility to adjust to new economic scenarios. In the current global environment it's very, very hard to maintain an overvalued currency."



Bank Rossii has raised interest rates, cut refinancing to banks and threatened to sell more reserves since January to prevent the ruble falling below 41 against the dollar-euro basket used to limit swings in the currency.



Kazakhstan that has 3.2 percent of global oil reserves, pledged to sell foreign-exchange holdings to defend the tenge at 150 per dollar, after letting the managed currency slide 21 percent on Feb. 4, amid a 3.4 percent drop in New York crude prices since the start of 2009.



The Russian and Ukrainian economies will probably contract this year and Kazakhstan expects growth to slow to 1 percent as the worst global financial crisis since the Great Depression saps consumer demand and freezes lending. Ukraine is receiving a $16.4 billion loan from the IMF, Russia has pledged more than $200 billion to bolster banks and companies and Kazakhstan announced a $4 billion bailout for its lenders last year.



Fixing the currency erodes reserves that would be better used to bolster the economy and insulate it against further declines in global sentiment and outlook, said Ganske at

Commerzbank.



"It's clear more currencies need to be moved away from their pegged regimes," he said. "We have no idea where things are going to go globally at the moment with commodities and demand."



With Japan, Europe and the U.S. already in recession, Federal Reserve Chairman Ben Bernanke warned yesterday in testimony to the Senate Budget Committee that a $700 billion bailout for American banks may have to be expanded. Prices for oil, the chief export earner for Russia and Kazakhstan, have slumped 71 percent from a June record on the New York Mercantile Exchange. Crude gained 2.7 percent to $42.76 a barrel today.



Russia's currency basket is made up of about 55 percent dollars and the rest euros and is used to minimize fluctuations that disadvantage exporters. The ruble won't be allowed to weaken beyond 41 to the basket unless Urals crude, the nation's chief export oil blend, slides to remains at $30 a barrel, Bank Rossii Chairman Sergey Ignatiev said Jan. 22. Urals added 0.4 percent to $42.60 a barrel today.



"They need to get rid of the 41 target as it constrains their flexibility to react to changes in the economic situation," said Clemens Grafe, chief economist in Moscow at UBS. "If they're forced to take it away when they're under pressure, then that's bad."



While most developed countries have moved away from fixed exchange-rate regimes since the system was established at the Bretton Woods global economic conference in 1944, many developing nations still adhere to currency management as a way of protecting exporters and stabilizing prices. Russia aims to free float its currency by 2011, according to the central bank, and a more flexible hryvnia is part of Ukraine's loan deal with the IMF.



The artificially strong Armenian dram was hurting economic growth and boosting unemployment, Nienke Oomes, the IMF's representative to the country, said yesterday, according to a central bank statement. "The best option is for the currency to float freely and for the market to determine the rate itself."