Russia Resists Devaluing the Ruble
By Sharon LaFraniere
It was a day of bad financial news from start to finish.
Trading on the Russian stock market was halted temporarily after blue-chip stocks fell as much as 25 percent in two hours. The Russian Trading System index -- the main indicator -- closed down 6.5 percent at the end of the day, following even bigger declines Monday and Tuesday.
Interest rates on short-term government bonds averaged about 170 percent -- far too high for the government to roll over those coming due. Meanwhile, the value of some of the government's longer-term bonds fell 17 percent.
Moody's Investors Service Inc., an international rating agency, downgraded Russia's sovereign foreign debt from B1 to B2. And American financier George Soros, who has invested billions in Russia, called the country's financial crisis "terminal."
The government continued to ride out the situation, although some economic analysts said it can wait no more than a month, at most, before its inability to borrow money from private investors brings the government to its financial knees. Prime Minister Sergei Kiriyenko said he saw "no objective financial reasons for this panic. Its origin is psychological." President Boris Yeltsin said the government would continue with its financial stabilization plan.
If the financial markets do not recover and the government cannot sell bonds or refinance some of its debt, Yeltsin's team is facing what could be politically disastrous choices. It could declare that the ruble is worth less, and so pay off some of its debt more cheaply. But Russians would find themselves suddenly poorer and the government's credibility would suffer.
It could tell creditors who expect to collect roughly $11 billion in high-interest government T-bills this year that they won't be paid on time, or won't be paid as much interest. But that would be viewed as almost an admission of bankruptcy. Or the government could seek still more financing from the rich nations and international lending organizations that only last month announced a $22.6 billion bailout to bolster markets and Yeltsin's government.
"What we're staring at here, and what people are so scared about, is the debt comes due, the government defaults on it, no one wants to lend anything to Russia, no one wants to buy rubles and the ruble collapses," said Al Breach, an economist with the Russian-European Center for Economic Policy in Moscow. "Then you have complete disaster. This is what we've seen in Indonesia."
Most financial experts say the new loans, spearheaded by the International Monetary Fund and the World Bank, put the government in much better economic shape that it would seem from the cosmically high interest rates that investors in government bonds are demanding. But with investors on the run and cash drying up, Russia now faces "a liquidity crisis," said Gavin Rankin, head of research for Troika Dialog, an investment firm. "Room for the government to maneuver is very limited. . . . The next trigger point will be if lines start appearing outside domestic banks."
So far, Russians are not stampeding to close household bank accounts or change their rubles into dollars. That may be because, although heavily publicized, the crisis still seems intangible. In any case, Russians keep more than 40 percent of their money outside of banks.
But there are other signs of trouble with the banks, which are invested heavily in short-term government bonds. The Central Bank Wednesday placed some restrictions on the ability of commercial banks to buy up hard currency, before backing off because of fears of panic selling, and officials have said banks have begun to shut off loans to one another.
Some importers, meanwhile, are complaining that they are being forced to raise prices because foreign banks will not accept the usual letters of credit from Russian banks.
The Central Bank tried hard today to dispel fears of widespread failure of the banking system. "I can say with confidence that we have control over the situation," said spokeswoman Irina Yasina. "Even if individual banks have problems, it won't grow into a system crisis."
Russia's financial crisis began almost 10 months ago and worsened in June and July with Asia's continuing financial crisis and the falling price of oil and gas, Russia's major exports. The government hoped to gain breathing room when the international rescue plan was announced. But the respite was brief. Within a week, the Central Bank was forced to dip into its foreign currency reserves to prop up the ruble, spending up to $800 million a week, by some estimates.
Yeltsin's current team has staked its credibility on the currency's stability. But some analysts say that devaluation appears increasingly inevitable; the only question is by how much, and how the government can control it to prevent a currency collapse.
Devaluation, and any inflation it might set off, would almost certainly worsen Yeltsin's political problems at a time when workers, unpaid for months, are staging sporadic strikes. In the early 1990s, after Russia liberalized prices, inflation wiped out the savings of many. Only slowly has the government reestablished trust in the ruble and instilled some confidence in the banks.
In a letter to the Financial Times published today, Soros, one of Russia's biggest investors, urged the Kremlin to devalue the ruble by 15 percent to 25 percent, set a fixed rate of exchange with foreign currencies and enforce it with a currency board. (Soros noted that he had no short position in the ruble and thus no self-interest in shorting the currency.) Kremlin officials responded that devaluation would not solve any of the country's economic problems.
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