Don's Diary

August 28, 1998

Thursday: Called by Reuters. "Had I a view on George Soros's letter in the Financial Times calling for a currency board and devaluation?'' The Russians have spent the past three years more or less successfully keeping the rouble within a crawling peg band against the US dollar. This, plus their control on the growth of monetary aggregates, had been the corner stone of Russian monetary policy.

Although output has fallen dramatically, inflation has dropped even more dramatically, from well over 1,000 per cent per annum in 1992, it is presently calculated at under 10 per cent. But when an international financial operator with the resources that Soros commands calls for abrupt changes in policy regime, he has to be taken seriously. Spent the next hour in discussion with Reuters, followed then by The Guardian correspondent, questions on the background to the terms of the recently announced International Monetary Fund financial package, and the lack of measures so far by the Russians to improve tax collection and government debt restructuring. The terms of the agreement promised up to $22 billion to support the Russian economy over the next couple of years.

Its announcement had been greeted with sighs of relief, offering the opportunity to deal with chronic problems, tax arrears and crippling refinancing of short-term government debt. Although the Russian economy has been vulnerable for months, the IMF announcement was only three weeks old. So on one of the questions - "what had prompted Soros to write today?'' - I was stumped. The afternoon was largely spent going over the same ground with BBC2's Newsnight to prepare the producer for an item on Russia. I agree to be interviewed, arguing in the programme that the Russians should not devalue because it would raise inflation and damage the government's credibility.

Friday: Turned to overdue research on the possibility of there being a capital constraint on unemployment in the United Kingdom. I was called by the BBC. "Would I do an interview next Monday on the UK's inflation prospects and the risk of recession?'' Agreed, but spent the weekend wishing I hadn't.

Saturday: Read a likely explanation of the timing of the Soros intervention in the Russian scene in The Guardian. Because the German economy and German banks are the most exposed to changes in Russia, knock-on effects of uncertainty about the rouble on the mark had enabled him to make an estimated $200 million profit from buying and selling the DM on Friday.

Sunday: Went through the Bank of England's Inflation Report for my interview with the BBC. I made notes on sections on the productivity trend and importers' pricing behaviour because I think we will probably work on these issues in the centre in the near future. Both have undergone apparent large changes in the recent past and an explanation is called for. Underline the section where the Monetary Policy Committee makes an implicit, but wide of the mark, criticism of our earlier work on productivity.

Monday: At 8am my son phoned to tell me the Russians had devalued, and he read out details from the Reuters screen. He had some fun at my expense, re my earlier remarks on Newsnight. I then discussed the possible consequences of the Russian moves with economics editor of The Guardian and, at length, with The Evening Standard. Later in the morning, the BBC Radio 4 economics correspondent turned up, and we went through the risk of recession arguments and likely interest-rate changes in the UK. Going home, I buy The Evening Standard, I recognise my wording in various places but I am not mentioned.

Tuesday: Talk with an Australian TV producer on the terms of the IMF's Russian package, fiscal trends, the problem of debt rescheduling and the likelihood of social unrest undermining Yeltsin. He was concerned with the US position in what had been happening. Why were the Americans so concerned? Another urgent deadline looms, a paper for the next issue of the CEF's Economic Outlook, "The Russian Crisis - Causes and Consequences''. What was becoming clearer was that the Russians had done three things: changed the exchange-rate regime (moving to a wider band, with the upper rate against the dollar now being 9.5, in effect a devaluation of more than 30 per cent), imposed capital controls on foreign-debt repayments by Russian banks, and effectively frozen the domestic market. The risks are extreme, that of reigniting inflation, of the authorities losing all credibility among foreign investors and so cutting themselves off from external sources of funds for possibly years, and, last, committing themselves to keeping an inefficient banking system. Whether the moves were bold or merely more evidence of the "crony capitalism'' that has held back the reform process, only time will tell. But, time, like Russian dollar reserves, is running out.

Brian Henry is director of the Centre for Economic Forecasting, London Business School.

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