Yeltsin Bets His Rubles

Russia’s dramatic decision to devalue its currency and declare a 90-day moratorium on repayment of its foreign debt will doubtless rattle global financial markets in the next few days, but the longer-term outlook for the Russian economy is far more uncertain.

Analysts say that if Russian President Boris N. Yeltsin can use the current crisis to push through the reforms that the International Monetary Fund and foreign investors are demanding, Russia may get back on the road to a gradual, albeit bumpy, recovery.

If not, however, the Russian economy could continue its tailspin, heightening the implications for other hard-hit economies in Asia and Latin America--and possibly for the United States and other Western countries.

“What the Russians have done is to buy time,” said Alan Stoga, a Wall Street analyst who has been following the situation. “The next question is what will they do with it? Maybe now that they have have fewer resources, we’ll see more genuine reforms.”

That assessment was widespread Monday as governments, financial markets and top international policymakers scrutinized Moscow’s latest moves and tried to sort out what they might mean for Russia and the rest of the world.

As analysts have been saying for weeks, the financial crisis that precipitated Monday’s actions stemmed primarily from a loss of confidence among investors that Moscow would be able to carry out the reforms it had promised.

Moscow had been dithering for months in carrying out Western demands that it overhaul its banking system, enact measures to guarantee property rights for businesses and individuals, and set up a viable tax-collection system. Eventually, financial markets lost their patience, causing the ruble to weaken and stock prices to plummet.

The advice from the United States and its major trading partners and from the International Monetary Fund over the weekend was uniform: Enact the needed reforms first, then wait to see how the financial markets react. Don’t do anything rash too soon, they said.

But Yeltsin apparently thought investors had made up their minds, and he decided to beat the markets to the punch and do himself what his advisors contended would be inevitable in a worst-case scenario: Devalue and declare a debt moratorium.

“They figured that in the end they couldn’t hold it back anymore,” said Morris Goldstein, an analyst with the Institute for International Economics.

Nevertheless, analysts said, what Yeltsin did Monday was a nail-biting gamble. If it works, he could emerge with a stronger economic program and improved prospects for bringing Russia out of the economic abyss. But if it fails, he may have run out of breathing room.

Russia joins a growing list of nations that have suffered currency devaluations over the last 13 months. Eleven countries have either officially devalued or seen their currencies forced lower by the markets.

The initial reaction to Russia’s announcement was, predictably, mixed. Currency and stock prices in most Asian and Latin American emerging markets declined. The U.S. dollar fell, but Wall Street soared.

Analysts noted that a more important market reading of the situation will come Friday when the Duma, the lower house of Russia’s parliament, meets to take up the reforms Yeltsin has proposed.

What the lawmakers do will be crucial, both for restoring confidence in Russia’s markets and for putting the economy on track. But the Duma, packed with former Communists, has not been friendly to Yeltsin economic reforms in the past.

Clifford Gaddy, the Brookings Institution’s top Russian expert, said the impact of Monday’s measures on Russia’s economy will be immediate--and severe:

* The devaluation will bring the return of virulent inflation, making many foreign goods unaffordable to most Russians. Borrowing from abroad will be almost impossible. Fledgling Russian banks will be squeezed.

* There is bound to be some “contagion” effect in the financial markets of emerging-markets countries in Asia--and possibly in Latin America.

On Monday, there was growing speculation that China may be forced to devalue its currency, the yuan, a move that could set off a new round of devaluations throughout Asia. But policymakers insisted there was no sign that Beijing was about to change course regarding the currency.

* Several leading German banks, which have been heavy lenders to the Russians, may find themselves having to take heavy losses as a result of the debt moratorium. U.S. policymakers said U.S. banks have been more reluctant to enter the Russian market, so they generally will not be as hard-hit.

There is no hint yet what will happen Friday in the halls of the Duma. Some analysts suggested that a major reason Yeltsin acted to devalue the ruble was to create enough of a crisis to spur lawmakers into action.

And several Russia watchers noted that if Yeltsin is allowed to move ahead with his reforms, the impact on all fronts could be short-lived. “It might not last that long if he can put these reforms into place,” one analyst said.

Russian officials have intentionally structured their devaluation so the ruble’s value can rise unimpeded if the markets react favorably. And the debt moratorium might well be ended before the 90-day limit.

But the list of needed reforms is daunting, and they would be difficult for even a more sophisticated and like-minded legislature to enact. Besides devising a tax-collection system, the IMF wants Russia to overhaul its entire banking structure, provide a legal framework for the ownership of private property, enact new bankruptcy laws and sell off more of its government-run companies to private entrepreneurs.

Whatever the outcome, there is no doubt that Yeltsin has taken a risk--particularly in declaring the debt moratorium and in forcing commercial banks to renegotiate their loans--steps that are likely to make investors wary for some time to come.

“It sounds like the patient has gone from intensive care back into surgery,” Stoga said Monday. “Hopefully, it’ll buy some time--but that will be the only use.”

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* MAIN STORY: A1

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The Devaluation Club

The number of countries that have suffered currency devaluations over the last 13 months grew by one more on Monday with Russia’s decision to devalue. Changes in currencies per U.S. dollar and the resulting loss of purchasing power to residents of the devaluing countries:

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Country/currency July 1, 1997* Mon.* Purchasing power loss Poland/zloty 3.29 3.50 --6% Canada/dollar 1.38 1.53 --10 Mexico/peso 7.92 9.26 --14 Singapore/dollar 1.43 1.76 --19 Japan/yen 114.88 145.96 --21 Australia/dollar 1.33 1.70 --22 S. Africa/rand 4.53 6.27 --28 S. Korea/won 887.80 1,333.00 --33 Russia/ruble 5.78 9.50** --39 Malaysia/ringgit 2.52 4.23 --40 Thailand/baht 24.70 41.80 --41 Indonesia/rupiah 2,432.00 12,900.00 --81

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*Currency per dollar

**New limit set by government; ruble traded in a wide range on Monday.

Source: Bloomberg News