Monday, November 26, 2007

Is Russia trying to devalue the Estonian Kroon?

There are reports in the papers today that Russian websites are saying that the Eesti Kroon is being devalued and people should cash in their EEK's for Euros. Officials have come out and said that this is not true but that hasn't stopped a number of people from rushing to currency exchange places to convert their kroons. Apparently most of the people converting have been ethnic Russians in places like Idu-Virumaa and it hasn't spread much further.

So the question is whether the Russian government (directly or through its various proxies) is trying to cause the kroon to collapse and whether they could succeed? Eesti Pank has said that they have more than enough foreign currency reserves to hold the peg and since the Kroon is a fairly illiquid currency on the global market I doubt that Russia or any Russian organization has enough kroons to sell to make any impact. Also, since the biggest losers of a devalued Kroon would likely be the Swedish banks that control Estonian finances they'd probably do everything they can to purchase the excess money that is coming onto the market. So the only real option would be to try to cause an internal "run on the bank" and get locals to sell their Kroons, which it seems like they are trying to do at the moment but I doubt it will work.

Now I wonder what would happen if Russia tried to push the value of the kroon up instead of down? Could this ruin the economy by making exports unrealistically expensive? Hypothetically if Russia took some of the vast amounts of money they make every day off of oil and started buying kroons they could push up the value of the kroon to effect an already vulnerable economy. I haven't thought this through very much so I'm sure there's a reason why this wouldn't work but it's an interesting thought nonetheless. Most likely Eesti Pank could flood the market with more kroons bringing the value back down to normal and negating any impact.

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