By Alex Nicholson
Jan. 30 (Bloomberg) -- Investors delivered a verdict on Russian Prime Minister Vladimir Putin’s economic policies less than 24 hours after he rebuked the West at Davos for sparking the worst crisis since the Great Depression.
The ruble fell 3.5 percent against the dollar yesterday, capping the biggest two-day plunge in a decade, following Putin’s scolding of U.S. financiers and policies at the World Economic Forum in the Swiss resort town.
“The idea of the Russians lecturing the West about how to run the economy is absurd,” said Niall Ferguson, a Harvard University history professor attending the conference. “It gives this whole event at Davos a surreal quality.”
The Russian central bank has spent $211 billion since August trying to support a currency that is the world’s third- worst performer this year after the Belarus ruble and the Zimbabwean dollar.
Since Putin, 56, became Russia’s leader in 2000, he has consolidated control of the government, eliminated political opposition, wielded supplies of natural gas as a political weapon and invaded neighboring Georgia.
When it comes to managing economic forces, though, he has displayed little more power than any other Davos attendee: Investors have removed about $290 billion from Russia since August, according to BNP Paribas.
‘It Couldn’t Dictate’
“The government found out that it couldn’t dictate to the market what to do,” said George Nianias, Moscow-based chairman of Denholm Hall Management Ltd., a hedge fund with about $350 million invested in emerging markets.
Putin, who sees the ruble as a potential anchor of stability in the region, has shown no sign of imposing capital controls.
The ruble is sliding along with the price of oil, Russia’s chief export earner. Urals crude, the nation’s main export blend, has slumped 69 percent from a July record to $43.48 a barrel, below the average of $70 needed to balance the 2009 budget. The decline in commodities prices will send Russia, the world’s largest energy exporter, into a recession this year as economic contractions in Europe and the U.S. cut demand.
In his Jan. 27 Davos speech, Putin said that “just one year ago we heard the words of our American friends from this tribune about the fundamental strength and the cloudless prospects for the U.S. economy.” Now, “the pride of Wall Street, the investment banks, have virtually ceased to exist.”
Putin also warned of the dangers of “unrestrained state interference” in the economy and of protectionism. “Blind faith in the omnipotence of the state” is a mistake, as proved by the Soviet Union’s collapse, he said.
Since the global economic crisis struck Russia in September, the government has imposed import duties on cars and trucks to protect local automakers, promised to buy shares in floundering corporations and is overseeing the allocation of $50 billion to help companies make foreign-loan payments. Business leaders are putting up part of their stock in their companies as collateral for government support.
In the question-and-answer session after Putin’s speech, Dell Inc. Chief Executive Officer Michael Dell said he was surprised by the prime minister’s warning about excessive state interference and asked Putin how Dell could help Russia develop its information-technology industry.
No Help Needed
“You know, the trick is that we don’t need help,” Putin said. “We’re not handicapped. The people who really need help are the poor, the disabled, pensioners, developing countries.”
In a Jan. 25 interview with Bloomberg Television, Putin advocated the establishment of regional investment funds as a step toward the introduction of regional reserve currencies to offset the influence of the dollar and euro. Russia and other former Soviet republics agreed last month to create a $10 billion fund to help them through the current meltdown.
The prime minister said in the interview that Russia had set itself apart from other countries by using reserves so as not to “crush the national currency overnight.” Russians haven’t forgotten the 1998 financial crisis, when the ruble plunged as much as 29 percent in a day.
Yesterday’s trading brought the ruble’s five-month decline to 33 percent. The central bank has widened its target trading band for the ruble 20 times since Nov. 11 and drained more than a third of its reserves before announcing last week that it would let “market” forces help determine the exchange rate.
Euros and Dollars
The latest band allows the ruble to fall to 41 against a basket of dollars and euros used to manage the currency’s fluctuations. Oil at $30 a barrel could test the new exchange- rate level, according to Bank Rossii, the central bank.
The bank’s target will be “very quickly” breached without more intervention, said Gaelle Blanchard of Societe Generale SA in London.
Russia spent a record $11 billion in one day last week to support the exchange rate, according to data from Moscow’s Trust Investment Bank for Jan. 19.
While Bank Rossii avoided intervening in the ruble in the three days following the announcement of the wider trading range on Jan. 22, it sold dollars yesterday and today, said Nikolai Kashcheev, head of economic research at MDM Bank. The ruble has lost 7.4 percent to the basket since the announcement.
“Right now the market is convinced it wants to see the ruble lower,” Blanchard said. “As long as the central bank gives these targets, then speculators are going to have something to aim for.”
To contact the reporter on this story: Alex Nicholson in Moscow at firstname.lastname@example.org
Last Updated: January 29, 2009 18:44 EST