Russia Fears Effects of Asia Crisis
By Daniel Williams
For the second time in two months, the central bank last week raised interest rates on treasury bills to keep skittish investors from fleeing the market. Russia issues the bills to cover chronic budget deficits.
Government officials scrambled to assure the public that no major government shake-ups are planned, in hopes that a picture of stability will calm investors and savers who rapidly are converting rubles into dollars.
Since Jan. 1, Russia's thinly traded stock market has dropped 33 percent, falling to about its level a year ago when a long run of rising prices began.
Interest rates climbed to 42 percent last week, up from about 20 percent four months ago, making borrowing more expensive for government and businesses.
Economists wonder whether Russia might not soon be a crisis spot. "The short list is Russia and Brazil," said Rudy Dornbusch, an economist at Massachusetts Institute of Technology, who was attending last week's World Economic Forum in Davos, Switzerland.
In any event, stopgap solutions designed to calm investors and protect the ruble create problems of their own, observers say, especially for a government that is promising economic expansion. Although the increase in interest rates keeps the government afloat, it reduces chances that Russia's economy will grow after having bottomed out in 1997.
Late last year, Russian officials expressed confidence that cheap money would mean the creation of new enterprises. Now, however, higher interest rates make borrowing more expensive for private industry and encourage banks to loan to the government rather than business.
Russia's problems began with the turmoil in Asia, when sharp declines in markets and currency values apparently prompted many investors to reject Russia as a sound place for their money as well. Fundamental problems in Russia's management of the economy also contribute to the uncertainty -- in particular, overspending and insufficient tax collection.
"I think we are worried that financial markets and the international community are getting tired of declarations and want to see real action," said Gunnar Tersman, an analyst with the Russian-European Center for Economic Policy.
Government officials say the solution to tax collection lies in the passage of a long-stalled tax reform bill to simplify payments and reduce rates. After dawdling for a year, the Federal Assembly, Russia's parliament, is to take up the issue next month. The new system would come into effect in 1999 at the earliest.
In the meantime, the tax bureau is trying to increase collections. Last year, between 50 percent and 60 percent of taxes was collected. This year, the government has launched a public relations campaign to encourage payment. In one television spot, a naked man sits at the edge of his bed with a worried look on his face. His wife peers at him anxiously from under the sheets.
"Lost the urge due to nerves?" a narrator asks. "Pay your taxes."
There is no set budget for this year. The Federal Assembly failed to approve a spending measure by the end of last year, and it is unclear when such a measure will be passed. In the meantime, the government is operating at 1997 budget levels, when the deficit was a hefty 7 percent of the gross national product.
"From a strategic perspective, the critical issue is the budget, the size of the deficit and tax collection," Sergei Dubinin, chairman of the Central Bank of the Russian Federation, said last week.
First Deputy Prime Minister Anatoly Chubais, long regarded as the government's chief economic overseer, predicts that Russia's economy will grow by at least 2 percent. "I really believe that . . . despite all the market problems of Asia, we'll see a strengthening of the economy of Russia," said Chubais, who was also in Davos.
No one knows if Chubais will be around to see the outcome: Rumors of his ouster have circulated for weeks.
Chubais has tried to present himself as an anti-monopolist and a proponent of fair play in business, seeking to end sweetheart deals between business and government.
His rivals criticize him for hypocrisy, noting he designed most of the sweetheart deals -- although they themselves seem uninterested in promoting legal reforms.
Yeltsin has said that Prime Minister Viktor Chernomyrdin will stay on but that one or two of his ministers might go. Today, Chubais tried to indicate that his job was not threatened. "Radical changes are unlikely," he said.
© Copyright 1998 The Washington Post Company