Russia Devalues Currency
By David Hoffman
The devaluation followed a deepening bank liquidity crisis last week in which the Central Bank was forced to rush emergency aid to some of Russia's biggest banks. Currency markets seized up and pressure mounted on the ruble exchange rate. Dollars, which account for a large share of Russia's semi-official gray economy, were in heavy demand as a safe haven.
President Boris Yeltsin, who on Friday vowed there would be no ruble devaluation, rushed to the Kremlin this morning to meet Prime Minister Sergei Kiriyenko after the government and Russian Central Bank announced the ruble would be devalued from the current rate of 6.3 to the dollar to about 9.5 to the dollar by year's end.
The announcement also said the government would suspend trading in government bonds known as GKOs. These bonds were the main instrument Russia had used to borrow domestically, but the shaky condition of its finances in recent months had driven the yields to astronomical levels and the government had repeatedly abandoned weekly bond auctions because the borrowing was too costly at annual rates of 150 percent and more.
In terse comments today the government said it would transform the bonds into "new securities" before the end of the year, but that trading in them was "suspended" until then. Billions of dollars in the bonds are held by Russian banks and others and it is not clear what impact the announcement will have on the country's already shaky financial institutions.
The Central Bank and the government also announced that they would not restrict the use of the ruble in import and export exchange transactions.
The decision to devalue the ruble is a clear setback for the economic reform efforts begun by Yeltsin after the 1992 collapse of the Soviet Union.
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