Ruble Takes Biggest 1-Day Drop in 4 Years
By David Hoffman
A week after the Russian government and Central Bank effectively devalued the currency, the ruble plunged in trading on the Moscow Interbank Currency Exchange, which was then shut down abruptly. The ruble opened at 7.14 to the dollar and closed at 7.86 to the dollar.
But at street kiosks and in electronic trading among banks, the value of the ruble was even lower -- in some cases nine to the dollar. A prominent economist, Andrei Illarionov, said it could soon hit 15 to the dollar despite the Central Bank's vow to set a limit of 9.5 rubles per dollar by year's end. It is not clear what would happen if events drove the ruble beyond the Central Bank's limit.
The ruble also gyrated after the Aug. 17 announcement of devaluation, but today's drop was the steepest since the Oct. 11, 1994, collapse known as Black Tuesday, when the ruble fell 24 percent against the dollar.
Amid continuing fears about the Russian banking system, three of the country's leading financial barons announced plans to merge their banks. The three banks -- Uneximbank, Menatep and Most -- are at the core of powerful financial-industrial groups that grew up after the collapse of the Soviet Union. Two of the magnates in the deal have spent most of the past year in a bitter squabble with each other.
Meanwhile, the Russian government began to publish details of its plan to restructure $40 billion in internal debt held by domestic and foreign investors. The newly reappointed prime minister, Viktor Chernomyrdin, signed off on the plan, in which the government said it will offer to reschedule short-term debt into new securities with three-, four- and five-year payouts. Delays in outlining the plan apparently contributed to the drop of the ruble.
After today's ruble decline, the Central Bank announced that it had cut the mandatory reserve requirements for banks, which had the effect of immediately injecting 4 billion rubles into the banking system. The Central Bank said the move was intended to help struggling banks make payments to clients and settle transactions stalled by the crisis.
The banks are undergoing a severe squeeze because many of them have sizable dollar obligations, while their various ruble assets have declined in value. Many of them cannot pay off their loans, and the government has imposed a 90-day moratorium on their overseas debts. The banks also had money tied up in short-term government treasury bills, which have been suspended.
However, instead of using the freed reserves for transactions, the banks almost immediately traded the rubles for dollars, creating a strong demand for dollars on the currency exchange, according to traders and a Central Bank statement. No one else on the exchange was offering dollars for sale, so the Central Bank wound up having to satisfy the day's entire demand of $429 million, the bank said.
"Banks do have rubles now," said Central Bank spokeswoman Irina Yasina. "We returned to them part of their mandatory reserves, hoping that they would settle with their depositors, with each other and effect clients' payments. But things took a different turn. Banks channeled the money to the currency markets."
Brunswick Warburg, an investment firm here, reported that the Central Bank has pumped more than 12 billion rubles into the banking system over the last three days to bolster the banks, rather than let some of them go under.
The bank merger is expected to be the first in a shakeout of the weakened financial industry here. Groups of large banks have been looking for partners in a frantic effort to survive the financial crisis. The merger brings together three of Russia's most prominent tycoons -- Vladimir Potanin, of Uneximbank, who also has media, communications, oil and mining interests; Mikhail Khodorkovsky of Menatep, who also heads Yukos, Russia's second-largest oil company; and Vladimir Gusinsky of Most Bank, whose empire is centered on media properties. They said each will donate 51 percent of the shares of his bank to a new holding company in which they will share ownership.
The merger is surprising because Gusinsky and Potanin were bitter competitors last year in a government auction of a telecommunications company. Potanin won the auction, but Gusinsky complained that his rival had help from the government.
Two other banks, National Reserve and Inkombank, also were reported to be planning a merger, according to the radio station Echo of Moscow, which said the deal had the blessing of natural gas monopoly Gazprom, a major holder in both banks.
President Boris Yeltsin, who abruptly fired Sergei Kiriyenko as prime minister on Sunday evening and reinstated his predecessor, Chernomyrdin, responded to questions about his health today by saying that "everything is fine." But some politicians and businessmen say they believe Yeltsin has never recovered fully from an illness last December that has left him periodically confused and incapacitated. The precise nature of the illness is not known.
Boris Nemtsov, who resigned as deputy prime minister this week on the reappointment of Chernomyrdin, was quoted in an interview by the German news magazine Stern as criticizing the once and current premier. Nemtsov told the magazine that Chernomyrdin "never even tried to cut spending" and that "he used credits like a drug."
"A huge pyramid of debt built up," Nemtsov said. "Sooner or later either the country had to explode or the financial system had to collapse. If Chernomyrdin says now that he can save the country, it is just a joke."
© Copyright 1998 The Washington Post Company