Tuesday, February 17, 2009

Russian Stocks and Currency Rally; Medvedev Cautiously Optimistic

Sources: Reuters, Medvedev Vows New Deal for Russians as Crisis Bites; Ruble Has Biggest Gain Since 1998 as Bank's Defense Deters Bets; Interfax, Russian Stock Market Closes Week on Major Note; Financial Times, Russian Industrial Output Falls 20%; AFP, Russian Industrial Output Plunges 16%

In an address to the Russian public on Sunday, President Medvedev spoke frankly about the effects of the global financial crisis on Russia. He promised a transparent approach to government action, and admitted that tough times are still ahead for the Russian economy, but also expressed hope that the economy will weather the current crisis. He defended devaluation of the ruble and also announced a government job-creation plan to stimulate the economy.

The Russian central bank's approach to exchange rate policy, in fact, seems to be working, as the ruble gained 4.2% against the dollar last week. After a series of gradual devaluations, the central bank pledged to defend the current rate through the month of February, which has discouraged speculators hoping to profit on a future devaluation. This in turn pushes the value of the ruble up against the dollar and the euro.

The Russian stock indexes also saw a gain last week, for the third in a row following a number of poor performing weeks late last year. Encouraged in part by the strengthening ruble, the RTS index went up 2.09% and the MICEX index by 6.07% from the previous week. Bonds also rose this week.

On a more negative note, recently released statistics show that the country's industrial output fell 20% in January from the previous month, and 16% for the year from the January 2008 figure. The drop in the annual number is the worst recorded in the past fifteen years. This may be an indication that the decrease in GDP this year will be larger than originally predicted.


1) Do you think that this rally in the stock market and the ruble's value is temporary or a sign that Russia's economic situation may bottom out soon?
2) Is the central bank's policy of defending the exchange rate for a time to curb speculation wise, or would it be smarter to allow the rate to decrease and save the foreign exchange reserves that are now being used to defend it?
3) Do you think Russia can recover from falling industrial output in 2009 and manage slow growth of the economy that will increase again as the global economic situation improves in future years, or is this a sign that sustainable growth is not possible under current Russian policy?

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