Russia's Financial Crisis Worsens
By Paul Blustein
Russia's financial crisis deepened yesterday, but officials in Washington sought to dampen expectations that a new international bailout for Moscow would be mobilized in a hurry. They said the government of President Boris Yeltsin must first take major steps to put the Russian economy on a sounder footing.
Russia's main stock index sank 10.2 percent, continuing a massive investor flight from the country's markets that has aroused fears of a collapse in the ruble and political tumult in the giant nuclear power. Yesterday's decline came despite an unusual Sunday statement from President Clinton pledging that the United States would support an international rescue package beyond aid already in place.
Making the Russian drop even more disturbing were sharp sell-offs in many Asian, East European and Latin American markets, which came atop several weeks of losses in emerging markets and fueled fresh worries about financial "contagion" spreading from Asia to Russia and across the globe.
The Japanese yen slid to a seven-year low, trading at 139.70 to the dollar, while Japan's Nikkei stock average was down 2.2 percent. The South African rand fell to a record low against the dollar, Hong Kong's stock index tumbled 3.6 percent, Thai share prices dropped 3.9 percent, and the Mexican and Brazilian stock indexes declined about 2.5 percent.
Asian markets were mixed in early trading today, with the Nikkei up 0.5 percent and Hong Kong down 2.2 percent.
Reflecting mounting concern in the Clinton administration, Deputy Treasury Secretary Lawrence H. Summers warned yesterday in a speech to bankers in Vienna: "Russia's trouble . . . has the potential to become Central Europe's, and the world's."
At the same time, however, officials involved in discussions over how to ease the Russian crisis cautioned that they are reluctant to rush out a giant international loan package of the sort assembled last year by the International Monetary Fund for South Korea, Thailand and Indonesia.
Speculation was rampant in financial markets last week that an "emergency stabilization fund" was being readied for Moscow, and the speculation was fed by Clinton's statement Sunday that Washington would support, "as necessary," bigger IMF loans for Russia beyond a three-year, $9.2 billion funding program already in place.
But the administration and the IMF have become extremely sensitive to criticism that big international rescue packages allow rich investors and banks to avoid suffering losses on their risky investments in foreign countries. Critics of the IMF have already begun complaining that an aid package for Moscow would bail out investors in Russian government bonds.
Moreover, officials said, simply speeding funds to Moscow would ease pressure on Yeltsin to implement vital reforms, such as improving the country's crippled tax-collection system. The authorities' inability to collect taxes from rich and powerful individuals and companies has caused the budget deficit to balloon and raised particularly deep concerns among investors about the government's solvency.
"As the Russians put reforms in place, we're going to be providing measured but clear support for those reforms," one international financial official said, "But we're going to be following the Russians' lead on this, not vice versa." He spoke on the condition that neither his name nor institution be named.
Still, officials conceded that financial stability in Russia is an extremely high priority for Washington, because of the risks that a worsening of the crisis there would undermine Yeltsin's reformist program and boost the political fortunes of extremist forces. The Russian president has staked his credibility on keeping the value of the ruble steady.
Thus for national security reasons, the administration could be forced to throw together a new funding package if the outflow of capital from the country quickens. Russia's reserves have dwindled to the dangerously low level of about $14 billion. By delaying international funding, and taking the time to negotiate a more carefully thought-out plan that includes broad reforms by the Russian government, Washington is risking a worsening of market sentiment, some analysts warned.
"We're in the phase where the market's saying, 'Show me the money,' " said Desmond Lachman, director of emerging-markets research at securities firm Salomon Smith Barney. "I don't think markets will stabilize until there is something more concrete" than Clinton's vague statement of support.
Moreover, Lachman and other analysts said, yesterday's downturn in emerging global markets underscores the danger that the Russian crisis poses for the global economy.
Fitch IBCA, a London-based international rating agency, issued a warning yesterday that stability in Central and Eastern Europe "would be put at risk if the political and economic situation in Russia were to worsen" and said it might have to review its debt ratings in the region. The agency also expressed concern that "there remains uncertainty regarding the timeliness of international support" for Moscow.
© Copyright 1998 The Washington Post Company