Yeltsin Puts Off Day of Reckoning on Economy, Making Matters Worse

Russian President Boris N. Yeltsin postponed a day of reckoning on the national economy, rocked by global market drops and home-grown scandals. But Monday’s evasion of judgment only accelerated a recent tumble in stock values, the ruble and general confidence in Russia’s future.

Just as this country seemed poised to turn around a six-year slide in industrial production and cash in on competitive sales of its natural assets, the Russian economy has been hit by ripple effects of financial turmoil in Asia, by the discrediting of privatization czar Anatoly B. Chubais and by fears that an impending ruble revaluation could stoke inflation.

In a few short weeks, the long-hoped-for breakthrough in Russia’s historic but thwarted transition to a market economy has been halted by global bad luck and local bad timing.

Yeltsin had set Monday as the deadline for evaluating the leadership’s success in paying off wage debts and luring needed investment. He had ordered the Cabinet to work through the weekend to provide him with a full picture of the economic state of the nation.

More than $5 billion in securities investment has been withdrawn from Russia over the past month as investors worldwide pull out of emerging markets. Russian regulations require foreign holders of treasury bills to give a month’s notice before converting proceeds of their sale, which accounts for the delayed reaction here to the Asian crises that began in late October.

Share values on the Russian Trading System stock market dropped 14% last week and are expected to suffer body blows after Monday’s decision by the Russian Central Bank to boost interest rates on treasury bills to halt the hemorrhage of securities investment. Now that the T-bill rates are more attractive, banks are all the more likely to convert their stocks.

Added to the financial woes is a crisis of confidence in Chubais, the chief navigator of the transition who has acknowledged accepting a $90,000 “book advance” from a company with connections to the successful bidder on several controversial sales of state shares.

Russia’s fractious parliament has been particularly unproductive of late as Communist and nationalist opponents of capitalism have seized on the bribery scandal in an effort to also taint Chubais’ economic reform plans.

The 1998 budget is being held up by hostile deputies in the Duma, the lower house, who want Chubais fired as the price for its passage. Vital tax legislation is also stalled, and important asset tenders, such as the sell-off of shares in the Rosneft oil conglomerate, have been put off for lack of bids amid the uncertainty and scandals.

Still, economists say, there are reasons for hope. Promising provinces in Russia’s vast federation have been shaking off Moscow’s smothering embrace. Cities such as Samara and Nizhny Novgorod have secured their own international bank loans and credits to jump-start industries, and the Saratov region last month adopted its own real estate law, having despaired of the Duma ever endorsing a federal version.

“The Kremlin economic Titanic is sinking, but boatloads of those trying to save themselves are sailing away,” said Gennady S. Lisichkin, a liberal economist and president of the Assn. in Support of Entrepreneurs.

Other analysts point out the undeniable accomplishments since Russia emerged from the economic wreckage of the Soviet Union. Inflation that had soared to four-digit annual rates in 1992 is pegged at less than 14% this year; the ruble exchange rate has been stabilized around 6,000 to the dollar by imposition of a “currency collar” underwritten by the Central Bank.

But Yeltsin promised in summer to clear what now amounts to $1.6 billion in state wage arrears by Jan. 1--a feat even optimistic analysts say cannot be achieved. Income from the scuttled share auctions was counted on to pay back the salary debts, and tax collection has been a pitiful fraction of the amounts envisioned in the budget.

So when Yeltsin on Sunday called off the Monday Cabinet session, claiming to need more time to make proper assessments, already skeptical investors and analysts rushed to their own judgment. The Central Bank had to intervene Monday to prop up the ruble as Russians scrambled to buy dollars and stock prices continued a three-day drop. The Central Bank was forced to boost interest rates to a whopping 36% for short-term treasury bills and to as much as 45% for borrowing beyond nine months.

The interest-rate jump should attract enough cash to keep the government working for now, but the higher rates will put even more strain on next year’s budget when the loans come due.

The ruble collar is draining Russia’s gold and foreign currency reserves, as $2.5 billion was spent to maintain it in the first two weeks of the crisis, the official Rossiskaya Gazeta newspaper reported.

And looming is a currency replacement that takes effect Jan. 1. Three zeros are being lopped off the ruble to make pricing less cumbersome. The move was intended to instill confidence in the currency now that inflation has been tamed.

But some economists predict damaging spillover from the current crises.

“We should expect significant danger to arise from the forthcoming [revaluation] of the ruble,” said Larisa I. Piyasheva, an economist and parliamentary budget committee advisor. “There is a possibility that some of the old rubles that are supposed to be exchanged and destroyed may well reappear in circulation, given the level of corruption that exists in the power circles.”

Both old and new bills will circulate simultaneously for a few months; any reappearance of withdrawn currency would fuel inflation.

The 1998 budget is expected to get a first hearing in the Duma on Friday, and Yeltsin has indicated that his report card on government performance amid the economic woes will be delivered next week.

But the opposition-controlled Duma is unlikely to pass the budget without major concessions from Yeltsin, such as the sacking of Chubais from his position of first deputy prime minister. Most liberal analysts fear that the departure of Chubais would further undermine investor confidence in Russia, and Yeltsin has vowed to keep him.

“Only this government is capable of doing something positive for Russia,” Deputy Prime Minister Oleg N. Sysuyev insisted in an interview with Komsomolskaya Pravda newspaper Monday, characterizing Chubais as a key member of Yeltsin’s reform team.