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Johnson's Russia List


August 19, 1998   
This Date's Issues: 2314  2315 

8:44 AM 11/30/00Johnson's Russia List
19 August 1998

[Note from David Johnson:
Unfortunately, because of the demands of other work the output of JRL 
may be somewhat diminished in the future. A solution to this problem is
1. Fred Weir on impact of rouble devaluation.
2. Gary Krueger: Devaluation.
3. Wayan Vota: What the "Emerging Russian Middle Class" says.
4. AP: Bank Closings Don't Worry Russians.
5. Reuters: Russia paper gives survival tips for rouble crisis.
6. Moscow Times: Chloe Arnold, Zyuganov Tells West Not to Invest 
In Yeltsin.

7. Los Angeles Times: Jerry Hough, 'Reform' Goes Tumbling With
Ruble Devaluation. 

8. Los Angeles Times: Michael McFaul, Forget About Monica, It's 
Moscow and the Stakes are Global.

9. Financial Times (UK): RUSSIA: Shrinking options. John Thornhill 
explains why Russia has devalued the rouble and asks whether it will work.

10. Reuters: Russian press lashes Yeltsin for devaluation.

12. Washington Post editorial: Falling Rubles.]
cutback in output


Date: Tue, 18 Aug 1998
For the Hindustan Times
From: Fred Weir in Moscow

Hi, find below human interest/analysis story on the
impact of rouble devaluation. Best regards, FW.

MOSCOW (HT Aug 19) -- Russians have endured several bouts
of currency chaos in the past decade, but this week's abrupt
rouble devaluation has left many saying they are angry, bitter
and thoroughly fed up with the government of Boris Yeltsin.
``That man has successfully lied to me for the last
time,'' says Maya Sinkayevicha, a 74-year old professor of
Russian literature at a Moscow technical university.
Ms. Sinkayevicha says she voted for Mr. Yeltsin in 1991
and again in 1996, despite having lost her life savings of 10,000
roubles in the financial turmoil that struck immediately
following the collapse of the USSR.
Her Soviet-era savings were worth about $12,000 a decade
ago but after the raging hyperinflation of 1992, the first year
of Mr. Yeltsin's reforms, it was barely enough to buy a Big Mac
and coffee at Moscow's new McDonald's restaurant.
``We took all that with patience because we hoped that
things would normalize after a period of transition,'' she says.
``But now I don't believe they ever will.''
Last week, as Russia's financial crisis worsened, Ms.
Sinkayevicha says she thought about converting the 8,000 new
roubles she has accumulated in recent years into a safe currency.
It would have been worth about $1,300.
But she says she felt reassured when Mr. Yeltsin went on
TV last Friday, from a government vacation spa in western Russia,
and insisted there was no cause for alarm.
``There will be no devaluation of the rouble, this is a
firm and clear decision,'' Mr. Yeltsin said. ``The situation is
under control''.
Then on Monday the government announced it would let the
rouble sink from 6.3 to 9.5 to the dollar, an effective
devaluation of more than one-third.
Amid the turmoil Ms. Sinkayevicha's bank, like many of
Russia's troubled financial institutions, has frozen all accounts
and won't say when depositors can get their money.
``I'm old and I will die soon, but I'll never forgive
Yeltsin for this,'' she says.
Experts say the most vulnerable are middle class people
like Ms. Sinkayevicha, who have decent jobs and incomes but
cannot protect themselves from the impact of rouble devaluation
the way Russia's handful of new rich, with their offshore bank
accounts and solid property, are able to do.
``The middle class was our hope to become a normal
society,'' says Igor Bunin, an analyst at the independent Centre
for Political Technologies.
``But it's exactly these people, the professionals, the
small businessmen, and skilled workers who will suffer the most
from rouble devaluation''.
The rouble's plunge will bring rapid increases in the
price of goods which must be purchased in hard currency, such as
imported cars, computers, appliances and foreign vacations.
In Moscow, where Russia's new middle class is heavily
concentrated, an estimated 60 per cent of all consumer goods on
the market are imported.
``Russian industry doesn't produce much worth having, so
people dream of all the Western goods they see advertised on TV.
As of today, they're going to have to dream at least 30 per cent
harder just to keep their hopes alive,'' says Mr. Bunin.
Pyotr Grishenko, 31, who operates a small shop selling
pirated computer software in downtown Moscow, says he is facing
``I have to pay for my stock, which comes mostly from
Bulgaria, in hard currency. But the market is so tight these days
that I simply cannot afford to raise prices to compensate for the
devaluation,'' he says. ``So I think I'm finished.
``Thank god I have no savings to lose.'' 
But many poorer people, who have been living on the
subsistence line for years, say they couldn't care less about the
fate of the currency.
``I have no roubles anyway, and there is no way to make
life worse for me,'' says Igor Vartazanov, a 29-year old day
labourer. ``If the rich geese are getting plucked and are
squawking about it, that just makes me laugh.'' 


Date: Tue, 18 Aug 1998 
From: Gary Krueger <> 
Subject: Devaluation

I received this note from a friend of mine in Moscow who is a partner in
a computer hardware/consulting firm. It captures the uncertainty
created by the decision to "devalue" by widening the band, but not
announcing a sustainable rate within a more narrow corridor. 
Gary Krueger
Macalester College

"Today MICEx is 6,885 yesterday 6,43. Most exchange offices sell $ for
9-10 rbls. Radio says that the one in Central Telegraph (grey building
on Tverskaya with USSR' Emblem on the wall - you should remember next to
Intourist hotel) sell for 15 rbls. 
That's not a panick yet but all the people of our circle talk just about
it. No work - no contracts, no credit terms, no invoices for prepayment.
All the prices are in $ but payment is in roubles. What rate?
Some retail stores made the prices as 9,5 for dollar - like the highest
point of the corridor for this year declared by government and central
bank yesterday."


Date: Tue, 18 Aug 1998
From: (Wayan Vota)
Subject: What the "Emerging Russian Middle Class" says

I read with great interest, all the wire reports and Western views of this,
most recent Russian financial calamity, but I must defer opinion to the
very people this effect most, the emerging Russian Middle Class.

I am a young Western professional, who is enjoying the experience of
working for a large western company in Moscow. Over the last few days I've
asked my Russian colleagues what they feel is happening to their country,
as Russians who, by working for a Western company in Moscow, are the cream
of the emerging Russian Middle Class.

On Friday, as the beginning of the default/devaluation (and that is what
this is, no matter what euphemism Yeltsin uses), I asked my colleagues what
they view of events were. They all agreed that something was up. They
knew the banks were not working as usual, and when the dollar dispensing
ATM machine in our office ran out, the news gave everyone a sick feeling.

Over the weekend, there was a odd calm in the city, reminding me of the
calm Florida feels every time there is a hurricane brewing offshore. You
know it will hit somewhere, but you just hope it isn't your town.

On Monday, when all the banks stopped dealing in dollars, and rumors that
SBS-Agro, one of Russia's largest banks, was bailed out by the government,
my colleagues started to worry about their payroll. The Russian staff,
paid in dollars by a large Moscow bank, were not so worried about
devaluation, dollars are still dollars, but about access to those dollars.
Since so much is conducted in cash USD here, essentially everything over
$250 in value in stores, all residential rent, and most personal services;
no USD meant no activity.

Today (Tuesday), as most street exchange booths quote 9.5 rrl/USD, my
colleagues see a repeat of what has already happened twice in recent
memory, the steep decline of the national currency, the steep incline of
consumer prices, and the continuing despair of all those who are not paid
in USD; pensioners, soldiers, government and provincial workers. I do not
sense the feelings of panic, as one might expect, but a attitude of
acceptance, as this has happened before, will happen again, and life will
continue as it always has.

Oddly enough, they feel that the ruble will not stay at 9.5rrl/USD, but
will appreciate back to around 7rrl/USD, and that the banks are trying to
gain in the panic. They also seem strangely ambivalent about the national
government. They laugh at Yeltsin's Friday comments backing the ruble and
the economy, but they also know that there isn't much choice in the
political field right now. Yeltsin may be a bit drunk at times, but he is
still better than the Party Presidents before him.

As one woman put it, with a shrug of her shoulders, "Eta Russeya."


Bank Closings Don't Worry Russians
August 18, 1998

MOSCOW (AP) -- There is probably no economic event so terrifying as a bank
failure. So why aren't more Russians losing sleep over predictions that a
third or more of the country's banks might soon collapse? 

The fact is, most Russians sleep quite soundly knowing that their savings are
stuffed in the mattress beneath them. And some economists say widespread bank
closings could only help the national economy by cleansing it of dubious
financial operators who scarcely meet anyone's definition of a banker. 

Perhaps that explains why there was little panic here Tuesday after the
effective devaluation of the ruble, despite the near certainty that it would
send many banks into bankruptcy. 

``I don't keep my money in banks as a matter of principle,'' said Tatyana
Borobyova, a flower seller. ``I don't trust either the banks or our government
because they have cheated us many times.'' 

Hers is a common view. Only about 30 percent of all Russian savings are
deposited in banks, according to Inna Francis, an analyst with United
Financial Group, a Moscow investment brokerage. And much of that money is
deposited in the national Sberbank, which guarantees its deposits and is
unlikely to fail. 

Moreover, only a few Russian banks meet the Western definition of a bank at
all. Many are essentially fronts for highly risky speculation in the stock and
money markets. It is this activity that is expected to be their downfall. It
also explains why few Russians will shed tears for them. 

``They don't do commercial lending, credit cards, hold consumer deposits --
nothing of what we would consider banking services. They just move money back
and forth,'' said Alan Rousso, director of the Moscow office of the Carnegie
Endowment for International Peace. 

``More than half the banks may fail,'' he added, ``but this, in some measure,
will be good for the Russian economy.'' 


Russia paper gives survival tips for rouble crisis

MOSCOW, Aug 18 (Reuters) - A popular Russian daily newspaper, keen to help
readers disoriented by currency panic, on Tuesday offered several useful tips
on how to survive the latest financial crunch. 

Komsomolskaya Pravda frontpaged a box labelled "cut and keep" a day after
dramatic changes in the government's monetary policy sent the buying rate for
dollars to nearly nine roubles per dollar from 6.2 just few days ago. 

Just imagine you are caught in a kind of whirlpool, the paper advised. Relax
and let the current carry you until it dies out. Only then try to surface. 

Don't rush to buy dollars. If you and me and everyone rushes to swap national
currency for foreign we really will destroy the rouble. There will be no one
but us to blame. 

If you have planned a major purchase go and make it now. Try to borrow money
from your friends if you are short of cash or try to buy something cheaper if
you cannot borrow. 

If you have saved money for a rainy day, go and buy as much food as you can.
Our foodstock is 60 percent imported and is doomed to become more expensive. 

If you have a multi-currency credit card account make sure it is pegged to
dollar. Otherwise you will be forced to withdraw foreign cash at worsening
exchange rates. 

If you have your savings in hard currency, just forget what you have read


Moscow Times
August 19, 1998 
Zyuganov Tells West Not to Invest In Yeltsin 
By Chloe Arnold
Staff Writer

Leading a wave of criticism Tuesday in the aftermath of the ruble 
devaluation, Communist Party leader Gennady Zyuganov warned Western 
businessmen against investing in a country with a "debauched" man at its 
helm and called for the resignation of the Russian president. 

Zyuganov implied that when the State Duma meets Friday in the first of 
three extraordinary sessions, President Boris Yeltsin is in for a 
vehement dressing down. The Russian government pushed for the sessions 
in a bid to persuade deputies to pass the rest of its legislation aimed 
at stabilizing the country's ailing economy. 

But Zyuganov, who leads the largest faction in parliament's lower house, 
said Yeltsin lost his credibility by allowing the ruble fall. 

"Our president has been completely devalued," he said. "The situation 
continues to deteriorate [because] the government is not united and it 
does not have a realistic program." 

The Communists and their allies in the opposition will demand that 
Yeltsin step down, "and a government reporting to the Duma and the 
Federation Council [Russia's upper house of parliament] be formed 
instead," Zyuganov said. He also threatened mass protests across the 
country in October. 

Were the Communists to come to power, they would honor Russia's debts, 
both internal and international, Zyuganov said. 

"I want to warn all investors, including Western ones: If you continue 
to give money to save a debauched, rotten, immoral person who is 
incapable even of guiding himself, then you must share the 
responsibility for the marasmus that now exists in this country," he 

Zyuganov did not say whether the opposition would insist on dismissing 
the government, led by Prime Minister Sergei Kiriyenko, saying only that 
deputies are "unlikely to demand his head" on Friday. 

In an ominous remark, Zyuganov compared Kiriyenko to Alexander Kerensky, 
leader of the Provisional Government, which lasted less than six months 
before it fell to the Bolsheviks in 1917. 

Russian newspapers, too, slammed the government in their reaction to the 
economic crisis. The centrist Nezavisimaya Gazeta led with mug shots of 
Kiriyenko, Central Bank head Sergei Dubinin, government envoy to 
international financial institutions Anatoly Chubais, and former Prime 
Minister Yegor Gaidar, who pushed through many of the early economic 
reforms after the collapse of the Soviet Union. The headline above them 
read: "Real Culprits of Financial Crisis Shirk Responsibility Once 

Liberal Noviye Izvestia led with "The only thing higher than the 
authorities' cynicism is their incompetence," harking back to a similar 
crisis at the beginning of the '90s, when millions of Russians stood 
helpless as their life savings turned into worthless bits of paper. 

But pro-market reform Russky Telegraf trumped every one of its peers 
with the simple headline "Game Over: Bankers Forget to Press Save" 
beneath Karl Bryullov's oil painting of "The Last Day of Pompeii." 

Despite the increasing turmoil in the capital Tuesday, Yeltsin continued 
his vacation at his Rus residence outside Moscow, where he will remain 
until the end of the week, presidential spokesman Sergei Yastrzhembsky 

However, the president receives regular reports on the state of the 
market, and keeps in touch with his prime minister by telephone, 
Yastrzhembsky said. 

Earlier in the day, Yeltsin accepted the resignation of Alexander 
Livshits, deputy head of presidential administration and former finance 
minister, who had tendered his resignation Monday. 

"I did everything I could for Russia," Interfax quoted Livshits as 
saying Monday. "I probably share responsibility for what has been 
happening on financial markets. I could not protect the president and so 
I am stepping down." 

But the government refused to comment on reports in the Russian media 
that both the prime minister and the Central Bank head had also offered 
to resign. Russky Telegraf announced Dubinin's days were numbered even 
before the devaluation occurred. 

"Most likely Dubinin will be replaced by Viktor Gerashenko [former head 
of both Gosbank, the Soviet Union's state bank, and the Central Bank]," 
the article said, claiming that Gerashenko has already held meetings 
with the prime minister. 

Meanwhile, Federation Council Chairman Yegor Stroyev called for a 
meeting of Yeltsin, Kiriyenko and the chairmen of both houses of 
parliament to discuss the financial and economic situation in the 
country, Interfax reported. 

"No conclusions can be made before a discussion of what really happened 
to the country's credit and financial system," Interfax quoted Stroyev 
as saying. 

He added that it would be wrong to fire government ministers at this 
stage. "Reshuffles and any abrupt changes will not do the economy any 
good," he said, according to Interfax. 


Los Angeles Times
August 18, 1998 
[for personal use only]
'Reform' Goes Tumbling With Ruble Devaluation 
Russia: Yeltsin needs, and should get, some help. But the rules
need to change if it is to do his country any good. 
Jerry Hough Is a Professor of Political Science at Duke University and
Senior Fellow at the Brookings Institution

Monday's devaluation of the Russian ruble and the temporary debt
default was inevitable but not a long-term solution. The problem is a
fundamentally flawed economic reform that Boris Yeltsin has kept afloat
with a financial pyramid game. It has now collapsed. It would be a mistake
to provide a huge Western bailout unless the reform strategy, which the
West has forced on Russia, is fundamentally changed. 
We should not forget how few expected this collapse a month ago. On July
13, the International Monetary Fund agreed to a large loan and encouraged
Russia to exchange much of its short-term ruble debt into long-term dollar
bonds. The Russian RTS market index had been in the mid-130s in the
previous week, but by July 20, it had risen to 193. The head of emerging
markets of Bank of America was one of many proclaiming that Russia is "off
the fear list." 
A week later, the RTS was back to 143 and by Aug. 13 it had reached 101.
Talk about volatility. Moreover, the banking system had ground to a halt.
Clearly the solution did not address the real problem. 
Devaluations help countries with trade deficits. But Russia continues to
run a large foreign trade surplus. Russia's difficulty is a massive 10-year
depression, and Yeltsin has tried to ward off the political consequences of
this in the large cities by keeping their standard of living artificially
high, especially in Moscow. To pay for the subsidies to these cities,
Yeltsin cut investment over 80%, refused agricultural reform so he could
pay collective farmers very little for their harvest, cut medical services
outside the largest cities and paid wages in these areas with great delay. 
With investment being starved, industry could not retool to produce new
goods, and agriculture could not obtain machinery, fertilizer and
pesticides. Grain production this year is 50% lower than under Mikhail
Gorbachev, and the number of cattle, dairy cows and chickens are down some
Life expectancy for men, already abysmally low under communism at 63 years,
fell to 57. Some 3 million people in Russia died who would have been alive
if the old life expectancy rates had been maintained. Lack of medicines and
a balanced diet were key reasons. 
As the system ran down at home, Yeltsin increasingly turned to foreigners
for money. But it was a a ponzi scheme in which foreign money received one
month was used to pay high interest rates on last month's 30-day bonds. As
the pyramid grew, so did the interest payments. As private investors,
already shaken by events in Asia, increasingly refused to play in the game,
it collapsed. 
We now face a monumental mess. The likelihood that Yeltsin will be
overthrown is high. His only hope is to form a coalition of experienced
politicians, some of them Communists, with a new reform policy. 
The alternative is a ruler such as retired Gen. Alexander I. Lebed, with
the most unpredictable of foreign policy consequences, virtually all of
them unpleasant. Many defenders of the IMF reform policy in the West see
Lebed as an Augusto Pinochet who might make their policy work if only he
ruled with an iron hand and if the West provided one last huge bailout. But
no one who has read what Lebed has said about Mormons, Jews, former Foreign
Minister Eduard Shevardnadze and the Yeltsin reformers--and how he said
it--can have the slightest faith he will follow the IMF's and the West's
A strong and growing majority even of Russian youth in our polls from 1993
to 1997 thought that Western economic advice was motivated by a desire to
weaken Russia. We need to counter this. All Russian food and medicine
imports are now much more expensive. We need a major humanitarian
program--not a loan, but a gift--of food and medicine to get the Russians
through the winter. It is not only in our vital interest, but a moral duty
given our role in imposing our brand of economic reform since 1991. 
But basically the disaster in Russia in wake of the disaster in Asia shows
that we must revise our understanding of economic development. Investment
is key to growth, and domestic investment must almost always precede
large-scale foreign investment. When market institutions are weak,
investment must be supported by government. Countries with infant
industries need protectionism, as the U.S. did in the 19th century. 
If such a policy is introduced, many will speak of the end of reform.
Instead it would mean the beginning of a period of real reform. The West
needs to play a constructive rather than destructive role in the changes
that are coming, because the foreign policy consequences will be high. 


Los Angeles Times
August 14, 1998
[for personal use only]
Forget About Monica, It's Moscow and the Stakes are Global 
An economic collapse with dire social consequences may be imminent. Clinton
must advance democracy. 
Michael Mcfaul Is a Professor of Political Science and Hoover Fellow at
Stanford University and a Senior Associate at the Carnegie Endowment for
International Peace

Most Americans believe that President Clinton faces the most
consequential moment of his career on Monday when he is scheduled to
testify before Kenneth Starr's grand jury. In fact, a much bigger day for
Clinton and the rest of the world comes just two weeks later when the
president meets with Boris Yeltsin in Moscow. By this time, Russia very
well may be in the throes of a major market meltdown, which in turn might
trigger political upheaval on a scale similar to Indonesia. Different
from Indonesia, however, Russia still has 10,000 nuclear weapons. The
gravity of Russia's crisis makes this September summit one of the most
important foreign policy missions of Clinton's presidency and an event of
much greater importance than his grand jury testimony.
The president's first task is to ensure that the focus of the summit
is on the big picture. The Cold War issues of arms control, European
security, regional conflicts and human rights cannot be allowed to
dominate either the tone or substance of the meeting. While Russian
ratification of the START II treaty would be an important achievement and
Russian concessions regarding trade with Iran would be welcome, Clinton
must make the preservation of markets and democracy in Russia his main
This will be difficult. Russia's market economy and electoral
democracy are once again under siege. With International Monetary Fund
assistance, the Russian government narrowly averted a major devaluation
of the ruble in July, but many believe it will not be so lucky this fall.
If devaluation occurs, the scenarios being spun by Russian liberals,
nationalists and communists alike are dire. A sudden rise in prices
triggered by a devaluation would stimulate even greater mass social
unrest than exists today. In the panic, trade union officials and
Communist Party leaders fear that they might lose the support of their
constituencies, which would turn to more radical political groups in
times of crisis. Some in Russia already have urged Yeltsin to consider
instituting emergency rule.
In this highly charged atmosphere, Clinton pronouncements about the
importance of START II, the necessity for Russians to pay higher taxes or
the evils of trading with Iran will look trivial. Instead, Clinton needs
to deliver messages about the importance of capitalism and democracy in
Russia and ideas and programs to assist the Russians in achieving these
The Clinton administration demonstrated leadership in responding
aggressively to Russia's latest financial crisis. Clinton must now follow
up this bailout package with a tough-love message that no future bailouts
will be forthcoming unless fundamental reforms are finally undertaken.
Clinton must call on the Russian government to get serious about
closing bankrupt enterprises, sell the stakes it still holds in hundreds
of enterprises and make credible commitments to implement its anti-crisis
program, including a more concerted effort to collect taxes from both
corporations and individuals.
After delivering this blunt message to Yeltsin and his government,
Clinton must provide creative solutions to help the Russian government
avoid bankruptcy. More expensive IMF bailout packages offer only
temporary solutions. Rather, Clinton should explore the possibility of a
massive debt swap of short-term Russian treasury bills for long-term U.S.
treasury bills. A sovereign debt swap would be better than direct
transfers of money to the Russian government because the market will know
that the money will not be squandered. Clinton needs to compel Yeltsin to
think boldly. At this stage, Yeltsin has no good options, but must choose
between bad and worse.
Clinton's message regarding Russian democracy must be equally blunt.
While imperfect, Russia has made progress in consolidating an electoral
democracy and Clinton should recognize publicly these achievements.
However, Clinton must deliver a private but firm message to Yeltsin and
other Russian elites about the negative consequences of circumventing the
democratic process--an idea that has become increasingly popular in elite
Moscow circles as the prospect of major economic downfall becomes more
likely. Authoritarian rule is wrong for Russia and any attempt to
implement it would fail.
Many Americans have grown weary of Russia as achievements have been
few and headaches many. But now is not the time to give up on Russia.
Only seven years since the Soviet collapse, Russia's revolution has by no
means ended. Russia's current leaders are still committed to developing a
market economy and a democratic polity, and it is in the vital national
interest of the United States to ensure that this trajectory continues.
No one has a greater interest in promoting the consolidation of
democracy and capitalism in Russia than does Bill Clinton. If Russia
eventually succeeds in becoming a member of the international community
of democratic states, Clinton will secure his place in history as an
important foreign policy president.


Financial Times (UK)
19 August 1998
[for personal use only]
RUSSIA: Shrinking options
John Thornhill explains why Russia has devalued the rouble and asks 
whether it will work

It was a typically Russian choice between the very bad and the 
catastrophic. And in a fraught meeting last weekend, top government 
ministers concluded that they had no alternative but to choose the very 
bad. With the central bank haemorrhaging up to $1bn of reserves a week 
and no additional financial support likely to be forthcoming from 
abroad, the government concluded it could no longer defend the rouble. 
It widened the bands within which the currency is free to float, imposed 
a 90-day moratorium on some foreign debt repayments and said it would 
restructure the domestic debt market. The rouble promptly sank.

This was very bad because by the spring of this year, Russians had 
started to believe in the once-incredible notion that their currency 
might be a store of value. Taxi drivers, stall holders, and odd-job men, 
who once demanded payment in dollars, grew just as happy to be paid in 
roubles. Thousands, if not millions, of Russians started opening rouble 
bank accounts and buying rouble-denominated financial assets. Russia was 
beginning to build its own financial system.

Those hard-won gains have now been jeopardised, if not wrecked, by the 
government's decision on Monday to cut the rouble free from its narrow 
trading band. Overnight, the government has severely damaged confidence 
in the currency - one of the main achievements of reform. Shops 
immediately marked up the price of goods by up to 20 per cent; currency 
exchange points were only prepared to sell dollars at a rate of 9:1 as 
opposed to the official rate of 6.43:1.

But the government deemed that all this, bad as it is, was preferable to 
the catastrophic alternative: propping up the rouble until the dollars 
ran out, when the rouble would have come crashing down. It is better, 
ministers argue, to use precious foreign reserves to help manage a 
controlled devaluation than to blow them all in a futile defence of the 

The fear was that if this had happened, inflation would have risen 
uncontrollably, the inexperienced government would have fallen, Boris 
Yeltsin's ebbing support would have vanished and Russia would be plunged 
back into a familiar turmoil, with a discredited president fighting a 
resurgent Communist party amid a nationalist backlash against reform.

In other words, the justification for this abrupt change of course is 
that it was the lesser of two evils and, in that sense, unavoidable. But 
that raises several questions: if it was inevitable, how did Russia come 
to face such an unenviable choice? And if the government has chosen the 
lesser of two evils, does this mean Russia has done enough to end its 
crisis, winning some financial stability and avoiding the direst 

Sergei Kiriyenko, Russia's youthful prime minister, explained on Monday 
how Russia had got into this mess. The government's first line of 
defence. he said, had been breached as a result of the further slide in 
the oil price and the downturn of global financial markets. It was now 
necessary to fall back on a second line of defence.

Already the recriminations have begun as to why that first line of 
defence proved so flimsy. Just a month ago, the International Monetary 
Fund approved the first tranche of an additional $11.2bn loan designed 
to preserve the rouble's stability.

But Pavel Teplukhin, economist at Troika Dialog Asset Management, a 
Moscow-based fund management group, argues the IMF package was 
misconceived because it attempted to treat the symptom of Russia's 
financial problems rather than its cause. The government's principal 
difficulty was that it faced a critical short-term funding crisis that 
was only obliquely addressed by the IMF package.

Understandably, the IMF was reluctant to use western taxpayers' money to 
buy off reckless foreign speculators in the Russian government debt 
market who were selling out of their positions and putting pressure on 
the rouble. So the IMF bolstered the central bank reserves to inject 
more confidence in Russia's financial stability and hoped the debt 
markets would work the problem out by themselves.

Initially, the strategy appeared to be working. Interest rates on 
short-term government debt tumbled from 130 per cent to 50 per cent and 
most investors passed up an opportunity to swap their rouble debt into 
dollar-denominated paper, believing the threat of a devaluation had 

The trouble was that the IMF deal depended on several crucial items of 
legislation passing through parliament - and the Duma emasculated much 
of the anti-crisis package designed to shift the tax burden from the 
corporate to the personal sector. That raised concerns about Russia's 
ability to meet the tough budget targets and the IMF decided to withhold 
$800m of its first $5.6bn tranche, undermining the credibility of its 
own programme. The government's poor handling of a series of debt 
auctions further unnerved investors while a blazing public row between 
the central bank and finance ministry over policy differences tarnished 
the image of Russia's monetary authorities.

A further downward lurch in the international oil price and Asian 
financial markets dealt the final blow to market confidence. "The global 
financial turmoil led to a flight to quality and Russia was not an 
obvious destination," says one economist drily.

The government's decisions on Monday to allow the rouble to float, to 
freeze and forcibly restructure the domestic debt market, and to impose 
a 90-day moratorium on the repayments of some foreign commercial debts 
were intended to buy the government time to grapple with its economic 
problems. There is no doubt that in the short-term these measures will 
help - albeit at a high long-term cost.

George Soros, the international speculator who argued in a letter to the 
Financial Times last week that Russia should change its self-defeating 
monetary policies and introduce a currency board after a "modest" 
devaluation, praised the government's actions.

The change of policy will certainly have several benefits. Before it 
froze its domestic debt market this week, the government was spending 
about one-third of its monthly budget revenues on interest payments. 
Much of this money will now be available to pay off back wages to 
striking coalminers and teachers and ease the alarmingly high social 
tensions in the country.

The slide in the rouble will also give Russia's export industries a 
short-term kick given that most of their income is derived in dollars 
while their costs are mostly in roubles. Russia's oil and gas companies 
have warmly welcomed the decision to let the rouble float and - it is 
hoped - will find it easier to pay their outstanding taxes to the 
government. The IMF programme, which remains in place, will help slow 
the fall in the rouble. The optimists hope that Russia's devaluation 
experience will resemble the UK after 1991, not Asia in 1997-98.

However, the government's actions are also fraught with new dangers. The 
most immediate is that Russian depositors may panic when they see the 
rouble slide, withdrawing their bank deposits and forcing an 
uncontrollable devaluation anyway. At the end of June, Russians held the 
equivalent of $25bn in rouble bank deposits (though they will clearly be 
worth less in dollar terms today); at last count, the central bank had 
just $17bn of hard currency reserves.

The further concern is that for the forseeable future the government has 
now cut itself off from both external sources of funding and internal 
ones (because Russians will not want to hold government paper of any 
kind). That will leave the government with no option but to run a budget 
surplus, including any interest payments on its restructured domestic 
debt. The 90-day moratorium on some foreign commercial debt repayments 
will make it far harder in future for Russian corporate borrowers to 
raise money to exploit their vast resources and spark economic growth.

While the government may argue it is not technically in default on its 
domestic debt, few international investors are likely to see it that 
way. At the very least, global capital markets will demand a far higher 
risk premium before lending to Russian borrowers.

"Russia now ranks somewhere between Nigeria and Kenya," says one 
disillusioned investor, "which is astonishing for a country with such 
rich resources next door to a Europe forging ahead with optimism and 

Moreover, the government's attempts to raise money by privatising more 
assets have been stymied by the breathtakingly low valuations that now 
attach to Russian assets. "The market capitalisation of Russia is now 
only three times that of Yahoo! (the US internet provider), which has 
sales of $70m and is half the size of Home Depot, the US DIY chain," 
observes Bill Browder, head of Hermitage Capital Management, which has 
been one of the biggest foreign investors in Russia.

And as if these financial pressures were not enough, the government 
faces an even more feverish political climate, which will make it all 
the harder to overhaul the tax regime and make other structural reforms.

Russia's Communist party is incensed that the government's latest 
measures will hit the poor far worse than the wealthy and is demanding 
President Yeltsin's resignation. Moreover, Gennady Zyuganov, the 
Communist party leader, warns foreign investors that they faced a 
nationalist backlash if they kept supporting Mr Yeltsin's discredited 
regime. "I want to warn investors - if you keep giving money to a 
drinking, degraded, and immoral person, you will have to share 
responsibility with him," he says.

"We are at the beginning, not the end, of a very serious crisis," says 
Mr Teplukhin. "I do not know how anyone can stop the situation from 
getting worse."


Russian press lashes Yeltsin for devaluation
By Peter Graff

MOSCOW, Aug 18 (Reuters) - Russian newspapers angrily accused Boris Yeltsin on
Tuesday of devaluing his own presidency along with the national currency. 

Although the government denied Monday's drastic financial measures amounted to
a devaluation, preferring to speak of a ``new financial course,'' the media
were savage in their criticism. 

Their wrath was aimed chiefly at Yeltsin, who had sternly vowed as recently as
last Friday that he would not allow a devaluation of the rouble. 

``If Yeltsin had deliberately set out to destroy his own prestige, he could
not have thought up a better way than to swear before the nation three days
before a devaluation that there would not be one,'' said Russky Telegraf
newspaper, which is generally supportive of reformers in the government. 

``The devaluation of the president,'' the paper proclaimed in a headline. 

The government on Monday abandoned its narrow target band for the rouble,
freeing it to move lower, while also freezing the domestic debt market and
imposing a 90-day moratorium on foreign commercial debts. 

``(Prime Minister Sergei) Kiriyenko can explain as much as he wants that what
has happened is not a devaluation, but a 'new financial policy.' Nobody but
Russian ministers and state-owned news agencies will call it anything but a
devaluation,'' Russky Telegraf said. 

Newspapers agreed the move was a major blow to Yeltsin. The relative stability
of the rouble, which recovered from four-digit inflation in the early 1990s
and has fallen only gradually against the dollar for several years, was seen
as one of his few conspicuous economic achievements. 

Since the new measures were announced, the rouble's value on the street has

The popular daily Moskovsky Komsomolets highlighted what it called a crisis of
credibility. ``Simply put, nobody believes anybody. And they believe the
government least of all,'' it wrote. 

``Although the devaluation isn't called a devaluation, that's exactly what it
is. The further the rouble cheapens against the dollar, the lower rouble
salaries become in fact. Prices rise, savings lose their value,'' the paper

Another paper, Tribuna, went further. ``To call this a madhouse is an insult
to (psychiatric patients),'' it said. 

``Even they can have a few days or months of lucidity. But the activities and
statements of our high state officials in recent days are not merely
senseless. They bear the mark of severe, muddy absurdity and deliberate lack
of touch with reality. 

``Nowhere and never have senior state individuals appeared as helpless, grey
and giftless as this has shown our president, prime minister and other
officials to be,'' the paper wrote. 


##The aim of the measures taken by the government and the
Central Bank last Monday is to protect the Russian banking
system against disaster, avoid a chain of bankruptcies in that
system and ensure budget stability, Anatoly Chubais, the
Russian President's special representative for liaison with
international financial organizations, told pressmen.
Speaking of the reasons for taking these steps, Chubais
stressed that, unfortunately, the fulfilment of the government
program which has been coordinated with the International
Monetary Fund, has not restored confidence on the markets. 
"That is why we have decided to take such measures," said
Anatoly Chubais. He stressed that what has had a strong
influence on the move was the drop of the world oil prices, the
situation on the Asian markets, as well as tax collection
problems in the country.
"Until the last moment we hoped to be able to do without
these measures, but we came to see on Friday that that step was
inevitable," said Anatoly Chubais. He noted that the IMF
treated the steps taken with understanding. The second tranche
of the stabilization credit will be paid out to Russia at the
established time. He also stressed that a new budget may
already be presented in a week's time, the stability of which
will be ensured by the measures taken by the government and the
Central Bank. 


Washington Post
August 18, 1998
Falling Rubles

RUSSIA'S DRAMATIC actions yesterday, allowing the value of the ruble to
fall and declaring a moratorium on some government debt, reversed a pledge
President Boris Yeltsin and his government had issued as recently as
Friday. It threatens one of the few clear-cut accomplishments of his mixed
record, which was to get inflation under control. It raises questions also
about the West's strategy for aiding Russia, including the $22.6 billion
rescue effort that Washington pushed through only four weeks ago. The
latest development is not so much a failure of policy as an acknowledgment
of failure that had become already clear. Russia's government was spending
more than it could afford to defend the value of the ruble against those --
Russians and foreigners alike -- who had lost faith in the stewardship of
Russia's economy. The floundering economy pushed Mr. Yeltsin into a corner,
and this was his response.

Russian officials blamed external factors for this state of affairs. The
financial meltdown in Asia scared investors away from all emerging markets,
including Russia's. It also lowered the worldwide demand for oil and gas,
which depressed the price of those commodities, which hurt Russia as a
major oil and gas exporter.

But these twin blows would have had far less impact were it not for
Russia's internal troubles. Despite Mr. Yeltsin's appointment this spring
of reformers to run his government, there was no consensus within Russian
society on the desirability of a speedy transition to the free market. A
majority of Russia's parliament remained opposed or suspicious. So Russia
remained frozen in mid-transition, without adequate legislation or
enforcement in crucial areas such as property rights, bankruptcy law, an
independent judiciary, corporate governance and more. In countries that
leapt quickly from communism to a free market, such as Poland or Estonia,
economic growth picked up early. Countries such as Russia and Ukraine,
which jumped only partway, have been mired in corruption and stagnation.

Russia's shrinking economy has provided neither enough jobs to support the
population nor enough tax revenue to support the government, pay the army,
etc. The country has had to borrow more and more to make up the difference.
The recent $22.6 billion loan package was only the latest in that pattern,
and its failure to bolster confidence showed that investors didn't believe
that more borrowing could solve Russia's problems.

The question is whether this partial devaluation and default can help any
more. On the one hand, the new policy buys some time for the government,
which will find it easier to repay ruble-denominated credits. It helps oil
tycoons, who can sell their product for dollars that are now worth more at
home. It may not hurt ordinary Russians as much as was predicted, since
many remain relatively unconnected to the global market and others hold
their savings in dollars already.

But this 180-degree reversal certainly won't inspire confidence among
foreign investors, and there is a real risk it could spark runaway
inflation and that the government won't be able to defend its new announced
level of ruble value. What's needed to forestall those worst-case outcomes
is substantial progress on structural reform in fiscal management, the tax
code, landowners' rights and bank soundness. Unfortunately, those were the
same reforms that were obviously needed last week, and the week before. 



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