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.

Inflatable

Estonian inflation hit 8.5% in October, nice. I don't see much about it in the papers or any comment from the government. I haven't seen a single step by the government to curb inflation (not that they have many options) and I'm starting to wonder if anyone in Eesti understands the economic consequences of high inflation? Ansip proudly stated that they hadn't adopted the Euro yet not because of any internal problem but because of the strict Euro entry requirements, wonder if he still uses that (weak) argument?

Please, don't give me a raise.

Eesti has little control over it's own economy at this point, and the little control the government does have they don't want to use because they were elected based on the promise that everyone would be rich. Now the head of the Estonian Central Bank, Andres Lipstok, has come out and asked people not to request a raise next year. Seriously? This is how far Estonian economic policy has fallen, we have to beg people not try and get a raise? Doesn't instill much confidence in the governments management of the economy.

More economics

More comments/analysis on the Estonian economy:

- Edward Lucas weighs in the on the overheating eastern economies.
- Estonian inflation climbs to 5.8% in June (Canada's inflation is 2.2%)
- Estonia's income inequality is judged to be among the worst in the EU.

Estonian economy overheated?

The Estonian economy has been firing on all cylinders for the past 2-3 years and a lot of people are predicting that the party is coming to an end soon, an article in todays Financial Times expands on this situation. Most recently Standard and Poors downgraded the Estonian economy to "negative outlook" because of the over heated economy, high inflation, increasing real wages and huge current account deficits.

The real problem with the Estonian economy is the government. The current coalition government has committed to a large amount of spending and tax cuts and it's unlikely that they'll be willing to sacrifice any of those commitments if the economy starts to turn sour. Since the Estonian Kroon is pegged to the USD Euro and most of the banks are owned by foreigners (thus lending decisions are made outside of the country with little regard to the local economy), the only outlet Estonia has to slow down the economy safely is through fiscal policy (ie. government spending). Unfortunately, instead of planning for the inevitable downturn and building surpluses, the government has pledged lower taxes and higher wages. If the economy slows down and the current era of cheap money all over the world starts to disappear we could start to see home foreclosures, small business closures and other serious problems in the short turn. Medium term, however, the Estonian economy should settle on 5-6% growth as it makes it's way towards the rest of Europe.

Can anything be done to ease the pain of a downturn? Only if the government is willing to reneg on some of it's promises (like continued tax cuts) and become more fiscally responsible.