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Wednesday, August 19, 1998 Published at 20:33 GMT 21:33 UK


Business: The Economy

When No means Yes



Economics correspondent James Morgan looks at the pressures behind Russia's decision to devalue its currency.

President Yeltsin's rejection of such a move last Friday is said to demonstrate that devaluation came as a great surprise.

But everybody knows that most devaluations are preceded by such statements, and for obvious reasons. You cannot predict that you will devalue because if you do it will happen straightaway and it will, therefore, not be a prediction.

Such moves take place under great pressure and in a crisis.


[ image: James Morgan:
James Morgan: "The thin line of defence broke"
Any government will do its best to stage a devaluation at a moment of its choosing rather than that of the market.

This cannot always be done but there is no point in giving way at the first sign of trouble.

So Russia did it on Monday and not on Friday.

The surprise was only that anybody was particularly surprised: the markets certainly were not because it had obviously been on their minds for some time.

Everybody knew it was a possibility even if, as many argued, it was entirely unnecessary from a strictly economic point of view. And that is why the innocents are often surprised on such occasions.

It is not just that a government rejects it, it often rejects it for good reason.

Basic problems remain

As President Yeltsin's economic adviser at the time, Alexander Livshits, said: "A devaluation will not help any of the country's basic problems."

He was right. But the markets spoke differently: they were sure that the government could not hold the line if tested. And they were right, and there was money to be made.

The markets also knew something else: the International Monetary Fund had run out of money.

It had already arranged international loans of more than $30bn over the past few years to help Russia, about a $100bn for East Asia as well, so its resources were exhausted.

So the thin line of defence broke.

Should we care?

It is almost superfluous to ask if this is a good thing. Is it good that a jackal should attack and consume a wounded deer?

It looks nasty but judged from the needs of the balance of nature and the security of the rest of the deer community it is no bad thing.

But in the case we are dealing with the wounded deer is very big and unusually dangerous. And that is why we care about it.

But let us discard the metaphor and look at the reality which is that tens of millions of people are going to be hurt by the Russian devaluation and that the country has a President who has lost most, if not all, of his credibility.

That clearly matters. But, you may ask, does the Russian economy matter that much to the rest of the world? The answer is No: after all Russia's total output is no more than that of the Netherlands.

It trades less than Denmark. It is a small player.

But it is another country that has been unable to resist the contagion that seems to be spreading inexorably across much of the globe.

Japan, Southeast Asia and now Russia all face recession and downward currency spirals that they seem unable to resist or resolve.

That, more than any other reason, is why Russia matters. We might be able to forget a cancerous spot on our nose if we cut it out quickly. But not if that is the third organ to be affected. Russia is part of very unpleasant chain of events.



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