Key Interest Rate Soars in Russia Amid Fiscal Woes

Russia’s Central Bank moved to protect the ruble Wednesday by tripling to 150% the interest rate it will pay to borrow money. But nervous investors and analysts said they still fear that an Asian-style economic collapse may be imminent--with potentially grave consequences for political stability.

Russia’s woes, combined with steep market declines in recent days in devastated East Asian economies, spurred heavy selling in stock markets worldwide Wednesday. On Wall Street, the Dow Jones industrial average recovered from an early steep decline to close with a modest 27-point loss. Battered Latin American markets also rebounded.

But analysts warned of more volatility ahead in global markets.

As Russian stocks continued their plunge by dropping an additional 10% in value, top officials here said they will look abroad for more loans to keep the economy afloat.

Some investors and economists called on the International Monetary Fund to step in and grant Russia a bailout worth billions of dollars to stave off a disastrous devaluation of the ruble.

“At the moment, everyone is in a panic situation,” said economist Al Breach of the Russian-European Center for Economic Policy in Moscow. “Russia needs a big bridge loan. Investors are asking: Do I get out now and lose some of my money, or do I stay in and lose all of my money?”

The crisis’ implications for the West are uncomfortable, to say the least. As one analyst said, it would be hard to imagine a return to stability in Europe--particularly Central Europe--if Russia is racked by internal political chaos. Russian resentment of the West--and hostility toward the United States--almost certainly would intensify. And there are always those who remind everyone that Russia still has nuclear weapons.

The IMF is expected to decide this week whether to release a $670-million installment of a $10-billion loan commitment to Russia. But analysts and investors said the payment would be much too small to make a difference in the current economic climate.

The Central Bank, for example, has spent $1.5 billion from its dollar reserves over the past 10 days--including $500 million Tuesday--to buy rubles and keep the currency’s value from collapsing. And Russian President Boris N. Yeltsin this week ordered the 1998 federal budget cut by the equivalent of $6.5 billion.

Michel Camdessus, managing director of the IMF, praised Russia’s emergency measures but gave no indication that a new line of credit was on the horizon.

“In the last few days, the Russian authorities, under the leadership and at the request of President Yeltsin, have taken extremely valuable measures--a full package which answers many of our concerns both in terms of control of expenditures and in terms of better collection of revenues,” he told reporters in Bishkek, Kyrgyzstan.

Officials familiar with negotiations between Russia and the IMF said discussions have focused only on conditions Moscow must meet to receive the $670 million. There has been no discussion about an additional emergency loan, they said.

Although Yeltsin has been vocal about the need for overhauling the economy--and has promised the IMF and Western investors that he will carry out changes--he actually has done little to follow through on his pledges. The government still is too fat and too expensive. The banking and financial systems are weak and disorganized. And the tax collection system is corrupt and inefficient.

Further, the government has become overdependent on foreign investors--particularly those willing to sink money into government securities or treasury bills. During the first three quarters of 1997, about 75% of Russia’s budget deficit was financed by foreign investors--and half of that investment was in the form of short-term treasury bills.

“In a sense, the situation with foreign loans reminds me of drug addicts,” said economist Nikolai P. Shemelyov, deputy director of the Institute of Europe. “The country keeps borrowing enough money for another ‘shot’ that will make it feel a little better but will kill it in the long run.”

Since the Asian financial crisis hit last summer, investors have grown leery of renewing investments in Russia. That, in turn, has forced the Central Bank to raise interest rates in hopes of stemming capital flight and stabilizing the ruble. The interest rate on Russian treasury bills went up from 18% last fall to 50% last week to 150% on Wednesday.

But now the government is in a box: It has had to start borrowing from the treasury bill market to pay interest on earlier treasury bills--a practice that almost guarantees the government will end up in the financial soup.

At the same time, Russia’s other major source of revenue--selling oil and other commodities on the world market--has decreased in value as world oil prices have plummeted.

Russia’s cash shortage has prompted the creation of a huge barter economy, in which companies often pay workers with products instead of money. “The recent policies have brought the country to a condition where its economy has been hurled back to the Middle Ages,” said economist Shemelyov. “Only 30% of the economy is supported by real money.”

Experts say the longer the Russian government delays changing its fiscal practices, the bigger the cuts it will have to make when it does get the gumption to carry them out. And if it delays too long, Russia may run out of money to continue defending its currency and be forced to devalue the ruble. That drastic move would drive up prices and increase the size of foreign debt.

In Washington, White House Press Secretary Mike McCurry said President Clinton and his economic advisors have been closely monitoring the developments in Russia.

McCurry told reporters that Clinton “has a lot of confidence in Prime Minister [Sergei V.] Kiriyenko and in the economic team that he has assembled. They are committed reformers.”

Some analysts say Russia’s economy itself has not fundamentally deteriorated in recent months: The deficit continues to shrink and inflation is under control. The current crisis can be traced to the government’s lack of cash it needs to pay its debts and spur economic development.

The Russian stock market, which has plummeted to less than 50% of what its value was in early 1997, is relatively small and its ups and downs do not have a significant effect on the overall economy. Some investment managers, such as Templeton Russia Fund President Mark Mobius, say now is the time to put money in selected Russian stocks because they are sure to rise in coming years.

“It’s a statement of fact; the market has crashed already,” said Mobius, who was in Moscow to kick off a new investment fund dealing exclusively in Russian stocks. “There will be a very big boom in the market. It will go up to unheard-of highs--but I don’t know when.”

Clifford Gaddy, a Russia expert at the Brookings Institution in Washington, said the IMF should intervene now and lend Russia another $4 billion to $10 billion, providing confidence to the international community and demonstrating that Russia won’t be left alone.

“Defending the ruble is bigger for Russia than for other countries,” Gaddy said. “It’s the single biggest proof that there’s been any reform at all. It’s psychologically important for the population. Devaluing would be perceived negatively both at home and abroad. People immediately would be asking, ‘What’s next?’ There would be no bottom.”

Paddock reported from Moscow and Pine from Washington.

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