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Steve Forbes: Russia's Ruble Defense Is Bound to Fizzle, Look Out Below

By    |   Wednesday, 17 December 2014 12:38 PM

The desperate rate hikes by Russia's central bank are bound to end up doing nothing to boost the ruble's value, predicts Forbes Media chairman Steve Forbes.

He noted that so far in 2014, the Russian currency has lost about half of its value against the dollar, which helped precipitate a move by its central bank to hike a key interest rate from 10.5 percent to 17 percent this week.

"This drastic move demonstrates that plunging oil prices are hammering Moscow far more than are the tepid, half-hearted sanctions imposed by the West after Putin's seizure of Crimea and his machinations to effectively make Ukraine a Russian satrap," Forbes wrote in a column on Forbes.com.

"The bank's move also demonstrates that Russia, like almost every other country in the world today, is clueless about monetary policy."

He predicts the much higher price for borrowing money will boomerang, and the Russian economy will simply weaken even more as a result.

In Forbes' view, Russia is suffering in part because Moscow believes that cheapening its currency will raise exports and thereby boost the economy — a Keynesian theory now being pursued in lockstep abandon by many central banks.

He contends that no country in history has ever achieved long-term prosperity by devaluing its currency.

"Yet even before Putin marched into Crimea and Ukraine, Moscow wasn't hiding its intentions to engineer a 'slight' weakening of the ruble to boost exports and help out the slowing Russian economy."

Forbes believes Putin's government should be repeatedly asserting that the ruble is as good as gold and that the Russian Central Bank intends to keep the ruble firmly fixed to the dollar at a set rate.

Among its concrete steps, he suggested Russia using it foreign reserves, including the dollar and euro, to buy back its own currency.

"A central bank can also use domestic assets like government bonds to achieve the same result: It sells bonds and takes the currency used to pay for them out of circulation. Traders quickly sense that such a move can't be resisted."

Failing to do such steps to reduce its monetary base, Forbes believes Russia is in trouble.

"Of course, the Russian economy has other major structural problems in addition to the imploding ruble. But it's within Moscow's means to salvage its currency. However, doing so would take knowledge, which this interest rate hike shows it lacks."

According to Matt O'Briend, an economics reporter for The Washington Post, Russia is "stuck in a Catch-22," an untenable situation with no apparent solution.

"It didn't take long for Russia to go from having a reasonable facsimile of an economy to having none at all. Not when oil prices have fallen 50 percent the past few months," O'Brien wrote.

"The problem is Russia's already-weak economy needs lower interest rates to push up growth, but Russia's companies need higher interest rates to push up the ruble. Those big corporations, you see, borrowed a lot of money in dollars, so the plummeting ruble makes their debts harder to pay off."

By midday Wednesday, Russia was starting to sell its foreign reserves in a gambit to support the sagging ruble, CNBC and Reuters reported.

"I don't think I have ever seen any currency go through such extreme gyrations in all my time in the industry. The ruble is fast becoming untradeable — maybe that is what the CBR (Russian central bank) wants," Timothy Ash, head of emerging markets research at Standard Bank, noted.

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The desperate rate hikes by Russia's central bank are bound to end up doing nothing to boost the ruble's value, predicts Forbes Media chairman Steve Forbes.
Forbes, Russia, ruble, currency
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2014-38-17
Wednesday, 17 December 2014 12:38 PM
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