After a couple weeks of stability, the ruble is falling again. The Russian Central Bank is once more in the market trying to stem its decline. Much of the commentary has the flavor of the sports page: First Central Bank Chairman Viktor Geraschenko blocks a shot on goal, then the speculators slip one into the net, then the two sides slap the puck around the ice for a while with nothing much happening.


How do we know who is winning and who is losing the ruble game? To many, the answer seems obvious: any strengthening of the ruble is seen as a win for Russia and any softening as a loss. But as is often the case in economics, things are not always as simple as they seem, and obvious answers are not always right. How do we know whether the ruble is weak or strong? Is a strong ruble good for Russia?


In answer to the first question, the true measure of the strength or weakness of the ruble is not the number of rubles it takes to buy a dollar, but the relative purchasing power of the two currencies. To determine that requires looking not just at what happens to the exchange rate quoted by the money changer down at the corner (what economists call the nominal exchange rate), but also at the effects of inflation.


Over the past 12 months, the nominal exchange rate has gone from about 600 rubles per dollar to over 1,600. Meanwhile, the general level of ruble prices and wages has increased about tenfold. The nominal exchange rate would have to have risen to some 6,000 rubles per dollar, or about three times its actual rate, to compensate for that tenfold inflation.


In real terms, then, the ruble is three times stronger and the dollar three times weaker than a year ago. Any foreign resident of Moscow who shops in Russian stores or rides Russian taxis knows this. At the same time, any Russian whose ruble salary has kept pace with inflation can buy three times more imported goods than a year ago.


Is this a triumph for Russian economic policy? Whether it is or not depends on the answer to our second question: Is a strong ruble good for Russia?


Unfortunately, this question is harder than the first, because neither a strong nor a weak ruble can be said to be good for Russia as a whole. Instead, some groups of Russians have gained from the rising real value of the ruble and others have lost.


Russian consumers are one group of winners. A shopper who would rather buy attractively packaged Danish sausage than drab Russian sausage can do so at a smaller sacrifice in terms of hours worked than a year ago. Traders who make their living by importing Danish sausage, Dutch beer, and American cat-food are a second group of winners. Russians who earn rubles and want to invest them abroad in Swiss banks or Florida real estate are a third group.


Meanwhile other groups are harmed by the strong ruble. The biggest losers are Russian producers of goods that compete with imports. For example, I am the reasonably satisfied owner of a Russian television set. I cannot pretend its picture matches that of a Sony, but it brings in the local news, and, with a little fine tuning, a fuzzy rendition of CNN. I bought it, two years ago, because its price was then less than a third of what I would have had to pay for an import.


Today, with a stronger ruble, it is much harder for a Russian television to compete with imports on the basis of price and no easier for it to compete on the basis of quality. The result is rising unemployment among Russian electronics workers. The same can be said for autoworkers, textile workers, candymakers, and countless others.


Each trip to the market brings new surprises. The other day traders at our local metro station were selling tomatoes imported from Iceland, of all places. How can it be profitable to grow a tomato in the middle of the winter in Iceland and ship it to Moscow? A stronger ruble is a big part of the answer.


A second group of losers are Russian exporters. As a strong ruble makes manufactured exports less competitive, the country becomes more dependent than ever on exports of raw materials, for which the quality gap is not a problem. But even raw-materials exporters find it harder to stay afloat because the dollars they earn do not buy enough rubles to pay their workers a living wage.


A third group of losers from the strong ruble is made up of people who have hard-currency capital they would like to invest in Russia. Some of these are Russian firms and individuals who earn money abroad, others are foreign firms and individuals who see investment opportunities here. Such investment is less attractive now than a year ago because it costs more dollars to build a factory, rent an office, or hire a secretary.


In fact, according to official statistics, Russia today is actually a net supplier of capital to the rest of the world. Think of it: Despite all lending by international agencies, all official foreign aid, and all private investment in computer plants and fast food restaurants; despite the desperate need for investment to save a crumbling infrastructure and modernize antiquated industry, Russia is on balance supplying the West with capital.


When the Central Bank intervenes to support the ruble in the foreign exchange market, then, it should not be seen as helping Russia as a whole, but as helping some Russians at the expense of others. It is helping middle-class consumers buy more imported goods and helping the nouveau riche buy Florida condominiums. It is hurting Russians who make goods for export or goods that compete with imports. And it also hurts everyone, Russian and foreign, who wants to invest here.


Does the Central Bank really know how to keep score in the ruble olympics? Is it even playing on the right team? There are days when one wonders.





Edwin Dolan is President of the American Institute of Business and Economics, an American business school in Moscow. He contributed this comment to The Moscow Times.