Q&A On The Ruble's Devaluation

The Russian government, struggling to keep its economy from collapsing, lowered the value of the ruble against the dollar, a move that reverberated in other world financial markets.

Following are some questions and answers on what the Russian government did Monday, and its significance:

Q: What exactly did Russia do?

A: The Russian central bank effectively devalued the national currency. It had allowed the ruble to trade within a relatively narrow range against the dollar before it would step in to prop up the currency. In recent weeks, as the ruble came under pressure, it spent billions of dollars to defend it.

On Monday, the central bank widened the trading band, saying it would not step in until the ruble fell as low as 9.5 to the dollar, from a previous 6.3. That means it will tolerate a 34 percent drop in the ruble's buying power. One ruble, which was worth about 15 cents on Friday, is now worth roughly a dime.

In addition, Russia also postponed payment on government treasury bills and imposed a 90-day moratorium on payments of foreign debt.

Q: What does this mean?

A: Inside Russia, the devaluation will pinch consumers' pocketbooks by making more costly the large amount of food and other goods imported from other countries to fill store shelves.

Local banks, many of them burdened with bad debts, will find the value of their ruble-denominated assets shrinking and will have difficulty trading treasury bills. Such blows could force some to shutter their doors. Russian exporters may find it easier to sell their goods abroad, since they will now cost less. But oil, Russia's most prized export, is priced in dollars.

For the government, the weaker currency will mean that when it borrows dollars or German marks abroad, they will go further at home. That could, for example, make it easier to repay months of wages and pensions owed to Russians.

Q: Is the United States affected?

A: For American consumers, the direct impact is negligible. The United States and Russia are not big trading partners. American businesses don't buy a lot of goods from Russia and don't sell a lot either. For those planning vacations in Russia, their dollars should go farther.

"Russia is relatively inconsequential in the world economy," said Allen Sinai, chief global economist at Primark Decision Economics. The Russian economy "has not been functioning. It can't have a major negative impact" on other economies, such as the United States.

Q: But what about Asia and other financial markets that have been roiled over the past year? Will this hurt them?

A: That's the big worry - what Sinai calls "the contagion effect" on other "high-risk" countries."

Some other emerging markets - that's the name widely used for financial markets in Russia and other developing countries - were immediately hit. Currencies in Eastern Europan countries, some of which have close trade ties with Russia, weakened vs. the dollar. But the currencies of some Southeast Asian nations, with few links to Russia, also slid as did the Mexican peso. Jittery investors moved into the dollar, considered a safe currency to hold in times of economic or political uncertainty.

Q: Where is the next big flashpoint?

A: In the days ahead, analysts will be keeping an eye on China to see whether the Russian turmoil will create enough uncertainty to force a devaluation of that nation's currency, the yuan, and the Hong Kong dollar.

Devaluations of those currencies would cause a convulsion in other financial markets and deal a sharp setback to efforts by Asian governments to repair their badly damaged economies. The longer their economies are in recession, or even worse, depression, the more pressure is put on healthy economies like America's, lowering even their immunity to the contagion.

Written by Sally Jacobsen