Russia’s Delayed Reaction

In a better-late-than-never move, Russia has created a crisis-management plan to deal with the effects of the Asian economic turbulence that has wreaked havoc on emerging markets since last summer.

The impact of the crisis on Russia has been dramatic. Since October, interest rates have more than doubled, the stock market has fallen by nearly half, and fears of a ruble collapse have shaken politicians and scared away investors.

After months of dithering, officials have initiated a feel-good program of promises and stabilization moves, hoping to lure back the foreign investors who fled Moscow markets late last year.

The actions recall those imposed in October by other countries, such as Brazil, that were also jolted by the crisis. Up to a point, they’re working.

A key step: Central bank assurances that everything would be done to protect the ruble from collapse were backed up by an early February increase of 14 percentage points in the interest rate, bringing the rate to more than 42%. The move has resulted in the return of some foreign investors, who had yanked as much as $6 billion out of Russia.

Economists say the stabilization program--even if late--shows that reformers have at last figured out how to deal with their first imported financial crisis in six years of capitalism.

“This is the first time the Russian government’s ever had a crisis where they’re directly affected by foreigners,” said economist Al Breach of the Russian-European Center for Economic Policy. “They had to show everyone they understood what was needed. They’ve done it. They’ve learned to make all the appropriate noises.”

Reformers say they will now move to tackle the underlying problems that left them vulnerable to the Asian turbulence. They say Russia will spend less, will rely less on borrowing from fickle foreigners and will collect taxes more efficiently. They say these measures will cut the budget deficit--which last year came to a whopping 7% of gross domestic product--to less than 5% this year.

It might be too late to renew hopes that this would be the year Russia’s newfound capitalism brought significant economic growth--up to 4%. Those cheery forecasts have been slashed repeatedly, with Economy Minister Yakov Urinson’s latest prediction at just 1.2%.

Outsiders will be watching to see if Russia can keep its promise to grow in ’98 while keeping reforms on track in the run-up to parliamentary and presidential elections in 2000.

If it is to do this, Russia will have to institute Western-style open markets and abandon the secretive economic management and crony capitalism that until recently flourished in Asia.

In the meantime, yields on treasury bills, which had peaked at a wild 45% during the last big market panic Jan. 30, were back to a more stable 34% by mid-February. The government wants to get rates down to pre-crisis levels of 15% to 18% by the end of the year.

Investors have also been cheered by President Boris N. Yeltsin’s renewed support of the West’s favorite reformer, First Deputy Prime Minister Anatoly B. Chubais, who was in disgrace over a corruption scandal but was told earlier this month to stay on until 2000 to direct the salvaging of Russia’s economic hopes.

Other countries seem increasingly likely to support Moscow’s program. And the International Monetary Fund, which last fall delayed a quarterly payment of a three-year, $9-billion loan, is more likely to return to the table, sources close to the negotiations say.

The IMF team is reportedly helping the government develop an economic plan that augments the budget and takes into account the downswings that have occurred since the budget legislation began making its way through the legislature. And the World Bank is discussing a new $3-billion lending program to Russia.

Yeltsin has ordered Chubais to get a streamlined tax code through a hostile parliament by April, and Finance Minister Mikhail Zadornov said tax revenue this January was up 30% from a year ago. But among those still worried are Western debt-rating agencies, including Moody’s Investors Services, which has said it may downgrade Russia’s debt.

“The Russian central government is having great difficulties in institutionalizing its control over the fiscal system, dealing with the regions, collecting taxes, bringing under control some of the power of the major industrial groups,” David Levey, managing director of the sovereign risk unit at Moody’s, told Reuters.

First Deputy Prime Minister Boris Y. Nemtsov, the only reformer seen as a possible presidential candidate in 2000, is portraying the Asian crisis as an example of how corruption and the concentration of wealth in a few hands could destroy Russia.

In a Feb. 11 interview with the newspaper Russky Telegraf, Nemtsov warned that Southeast Asia’s concentration of power in the hands of tiny oligarchies had contributed to its economic fall. The same could happen in Russia, where a similar oligarchy controls power, he said.

“Large financial-industrial empires created in Southeast Asian countries concentrated huge labor resources, had powerful friends in the upper echelons of power, and their performance was based on borrowed money,” he said. “Such a system was extremely unstable, and it eventually collapsed, causing the current financial crisis in these countries. The same lies in store for Russia if the trend is not stopped.”

The government has been aggressively selling state assets to plug the budget holes created by tax shortfalls. How honestly it carries out a series of privatization auctions planned for this year but delayed during the last few months, will be another test of whether it is serious about reform.

Eliminating secrecy in such sales--and not letting Russia’s assets be carved up among insiders at bargain-basement prices--will be crucial if privatization is to bring real money into the national budget.

“The second wave of consequences of the world financial crisis is over in Russia,” Chubais said last week. But he added a caution: “Although the situation has clearly changed for the better, there is no room for complacency.”

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Asia Infects Russia

In Russia’s first experience with foreign markets turmoil since its switch to capitalism six years ago, the Asian economic crisis has undermined the ruble, sent interest rates soaring and driven stock prices down. Weekly closes and most recent for the Russian/Skate Press index:

Wednesday close: 1,353.31

Source: Bloomberg News