Central Bank’s measures delayed and not flat-footed enough
The fact that bank depositors in Russia are fearing of actual devaluation of their capital may provoke banking panics, in which case it is small and medium-sized banks that are very likely to be principal victims. The panics would be followed by economic contraction, decline in output and unemployment growth.
What is the response to this by the banking community and the Russian monetary authorities?
The former shows an odd beh * avior: as an illustration, the Association of Russian Banks has recently addressed the Central Bank with a request to launch a quantitative easing policy. Bankers mentioned, among other motives, that the U.S. monetary authorities pursued the same policy to promote short-term economic growth.
However, the major problem now is sustainability of the Russian banking system rather than unemployment and the difference between real and potential outputs.
Quantitative easing seems to be absolutely useless for the time being: employment rate is high in the economy, the current situation makes it extremely difficult for output to grow through demand stimulation. Bankers should have first of all asked the Central Bank to prevent a banking crisis, request the monetary authorities to make solid statements on the performance of the lender of last resort function, as well as steps towards mitigation of the foreign exchange crisis which might escalate into a banking crisis.
In particular, Central Bank's solid statements on guaranteed support of the banking system would calm down those insured themselves against foreign exchange exposure but express concern about problems likely to be encountered in banks regarding depositors influx caused by the foreign exchange crisis. Presumably, the monetary authorities also should take measures aimed at mitigating the foreign exchange crisis.
The Central Bank seems to have begun to respond to the current situation, but its measures seem to be a bit delayed and not flat-footed enough.
It's hard to argue that the monetary authorities should gradually pass on to the performance of functions typical of a modern central bank. The same was confirmed by the IMF mission in Russia in September, suggesting, among other key recommendations, that the Central Bank should continue the transition to an inflation targeting policy and gradually transfer to the market the powers of defining an equilibrium exchange rate. However, the IMF also mentioned the need for FX interventions in cases when the national currency is under heavy pressure.
The devaluation shouldn't be left uncontrolled unless there is the conviction that no panics will be provoked by the plunged and then stabilized ruble. The recent developments show that there is no conviction that such is indeed the case.
Ivan Lyubimov, senior researcher
The comments are based on Ivan Lyubimov's article "Почему нельзя допускать бесконтрольную девальвацию рубля" ["Why the devaluation of the ruble shouldn't be left uncontrolled"] published on Forbes.ru