Economic Crisis in Russia Holds Host of Threats
The growing possibility that Russia may be moving inexorably toward a financial blowup has heightened fears in world markets that the turmoil will spread to other economies and possibly revive East-West tensions to boot.
If Russia is pushed over the brink and forced to default on its short-term government debt--or worse yet, to devalue the ruble--the shock waves could destabilize the world’s already jittery markets amid the ongoing Asian financial crisis, some analysts predict.
Most worrisome of all is the threat that if Russia falls more deeply into recession, the resulting economic privation will spawn a nationalistic backlash that will turn the populace intractably anti-West. Since Russia is still a major nuclear power, the prospect is frightening.
With that in mind, the Clinton administration and major U.S. allies have been scurrying to find a solution--or, more accurately, a way to assemble additional aid if necessary--that would allow the government of Russian President Boris N. Yeltsin to stave off economic collapse.
Russia-watchers warn that policymakers must move quickly. “It’s only a question of days,” said Anders Aslund, a former advisor to the Russian government now at the Carnegie Endowment for International Peace, a Washington research group that monitors foreign affairs.
The crisis in Russia stems from two major factors: First, the government has dithered on making long-promised financial reforms, particularly on devising a tax-collection system. The government is collecting far less revenue than it needs to cover its enormous expenses. Second, it has run up a mountain of short-term debt that it no longer can afford to repay.
Unless Yeltsin can tackle these problems quickly, analysts say he is likely to have no choice but to devalue the ruble or to default on the short-term debt--that is, to force banks and other investors to restructure the loans and accept decidedly less-favorable terms.
That in turn would unnerve the world’s financial markets, close off Russia’s ability to attract foreign investment for the foreseeable future, and raise prices drastically for many foods and other imported goods that have become staples for ordinary Russians.
The turmoil in the markets already has alarmed Russian and Western policymakers. The Russian stock market essentially ground to a halt on Thursday. The ruble is under enormous pressure. And Standard & Poor’s Corp. has downgraded the rating on Russia’s domestic debt.
Still, many analysts contend that the probable consequences of a Russian blowup could be exaggerated. Despite its size, Russia has relatively minuscule trade and financial links with other countries. Foreign market reaction to Russia’s troubles is seen as heavily psychological.
Adam Posen, an analyst at the Institute for International Economics, predicted that while the so-called “contagion” may spread the turmoil to financial markets in other countries and further depress commodity prices, the impact--and long-term damage--is likely to be small.
As for a political backlash, Posen argued that while the Russians have become somewhat more prickly in their dealings with the West on issues such as Kosovo and Iraq, they are a long way from any state of political--let alone military--hostility.
“The Russians have had it bad from an economic standpoint for years--with rising unemployment, a soaring crime rate, a black-market economy and even a decline in individual life expectancy--and we haven’t seen any [widespread] disorder yet,” Posen said.
Clifford Gaddy, a Russia expert at the Brookings Institution, agreed. A devaluation of the ruble or a restructuring of Russia’s short-term government debt “doesn’t necessarily mean that everything there stops and collapses,” Gaddy said.
There could even be some medium-term benefits for the Russians, analysts say: With a lower ruble, Russian exports would become more competitive, and it is easier for the Russian government to collect taxes from export companies than from domestic firms.
As for the impact on other countries and on world financial markets, Gaddy said, while what happens in Russia may erode investors’ confidence in emerging-market countries a bit further, if it comes about with adequate warning, “the contagion may not be that great.”
Perhaps the worst consequence that analysts foresee from any Russian devaluation or default would be that it might dampen any remaining enthusiasm for trying to adopt Western-style capitalism--leaving Russia isolated and difficult to integrate into the world economy.
One difficulty that Western officials have in trying to help Moscow avert a financial blowup is that the key lies with Yeltsin and the Duma. If they do not act decisively, analysts say, there is little that Washington can do to stave off collapse.
For one thing, the West already has assembled a $22.6-billion financial rescue package under the aegis of the International Monetary Fund, and there is virtually nothing left in the cupboard to give Moscow even if it would do any good. IMF coffers are almost bare, and Congress is balking at providing more.
All sides agree that the next few days will be critical. Yeltsin’s new push on Friday to recall the Duma, or lower house of parliament, into a special legislative session to enact the IMF-prescribed reforms was viewed as an encouraging sign, if he can pull it off.
* DIRE WARNING
President Clinton urges Boris Yeltsin to take steps to avert a Russian financial collapse. A8
