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Russia: Financial Crises Threaten Ruble

  • Stephanie Baker



Moscow, 21 November 1997 (RFE/RL) -- Adding his voice to a chorus of concerns about the Russia's shaky financial markets, prominent American banker Boris Jordan urged the Russian government to take steps to shield itself from global financial turmoil.

Jordan, who is head of one of Russia's top investment banks, MFK-Renaissance Capital, said yesterday that economic reforms would be seriously undermined if the crisis on world markets continues for another two or three months. He urged the government to adopt a package to support the ruble and Russia's banking sector.

Russian debt and equity prices have been hit hard by the worldwide flight from emerging markets. Jordan, a U.S. citizen of Russian origin, noted that foreign investors had already pulled $4 billion out of Russia's treasury bill market and predicted another $1 to $2 billion would be withdrawn in December.

At the same time, financial crises in other emerging markets are threatening the stability of Russian Treasury bills, known by their Russian acronym as GKOs.

Investors from Brazil and South Korea - whose currencies have come under intense pressure during the global turmoil - have significant Russian T-bill holdings. Jordan estimated that South Korean investors had taken $2 to $3 billion out of the GKO market, while Brazilians had withdrawn roughly $1 billion.

Like many market watchers here, Jordan outlined the frightening scenario that could happen if the global turmoil continues. The continued outflows from the bond market could put tremendous pressure on the Central Bank's hard currency reserves.

When foreigners leave the market, they convert their ruble-denominated holdings into dollars, causing the Central Bank's hard currency reserves to dwindle. At the same time, the Central Bank is being forced to intervene on the GKO market, buying up bills in order to maintain stability on the market and make up for declining demand.

Jordan said if foreigners continue to leave the market, the Central Bank's shrinking reserves could force a devaluation of the ruble, leading to massive losses for Russian banks.

Jordan is not alone. Other market watchers have said that the exodus of foreigners from the Russian market could put pressure on the ruble. Foreign investors are estimated to hold roughly 20 billion in GKOs, roughly matching the firepower of the Central Bank, which had hard currency reserves of roughly 23 billion as of November 1. If all foreign investors sold their ruble-denominated GKOs for dollars, the Central Bank's reserves would be nearly depleted.

The Central Bank raised its refinancing rate, which acts as an overall cap on interest rates, to 28 percent from 21 earlier this month in an attempt to make Russia more attractive to foreign investors and put bond prices in line with other emerging markets. But Jordan said the bank could be forced to raise rates by another "few percentage points" if the crisis continues. This would push up the cost of borrowing for the Russian government, adding to its already sizable budget deficit.

As he put it: "We expect some steps from the government to stabilize the market in the coming weeks." But he said the Central Bank could help calm investors immediately by being more transparent about the state of the financial markets.

Many economists say that Russia, unlike other emerging markets, will be able to quickly bounce back once the global financial crisis blows over because its economic fundamentals are in better shape. The overall level of debt in the economy is low, and Russia maintains a positive current account, the measure of funds flowing in and out of the country. But many say that if the crisis continues for as long as six months, Russia's economy could start to feel the pain.
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