Prague, 14 August 1998 (RFE/RL) -- Russia's deepening financial crisis is alarming neighboring countries, many of which are still closely linked to the Russian economy from the Soviet era.
Take the little Caucasian republic of Armenia, for example. Although Armenia has made good progress in recent years in strengthening trade links with Iran, Russia remains Armenia's dominant economic partner. That's true of actual trade, and the supply of credits, and joint projects.
In addition, there are hundreds of thousands of Armenians now living in Russia working unofficially. They send back millions of rubles in wages to their families at home. It's obvious then that Armenia has much to fear from catastrophe in Russia.
Looking further east, to Central Asia, we find similar ties between Kazakhstan and Russia. The Kazakh government has made efforts to re-align trade southwards and westwards, to Pakistan and Turkey. But Russia still supplies the bulk of the consumer and industrial market in Kazakhstan, and likewise takes Kazakh exports.
Moving west, we find the links with Russia diminishing. Poland, the star economy among the transition states, now has only about eight percent of its formal trade with Russia, not including small cross-border trade. Although any collapse in Russia would have its impact on Poland, grave consequences there are not likely.
So how could Russian crisis impact its neighbors? Of course, any loss of confidence in Russia tends to scare investors away from other transition states. But London-based senior economic analyst (with MMS Consultants) Sheetal Radia says it's important to keep in mind that the present scare is limited to the Russian financial markets, and is not directly related to the real economy.
"You have to distinguish between the real economy and what the financial markets are saying. I think there is a very big chasm between the two, because Russia has tried to implement physical reform and is seeing some benefits of that: tax revenues are creeping up, not significantly but they're heading in the right direction. Inflation is low, and the Russian Central Bank has maintained a credible stance in the most difficult circumstances. All that is not being rewarded by the financial market."
Radia says that the current events on the Moscow stock exchange should not necessarily affect the real economy in terms of trade, all other factors being equal. Much current trade with neighboring states is on a small-scale basis or through barter. In addition, he says that the larger Russian banks have sufficient liquidity to extend credits on a normal basis.
But as the Russian government is emphasizing ever more strongly the need to increase tax revenues, that can have an impact on neighboring states. For instance, the Russian government is pressing big corporations to increase their tax payments, and that means those corporations will try to minimize barter deals. This, in turn, is likely to have a major impact on other countries in the region. Moldova for instance, is facing a $600 million cash bill from Russia's Gazprom, which can't be settled by barter. Other countries, such as Belarus or Ukraine are likely to be similarly affected.
A real danger for all concerned is a collapse of the ruble. This would affect other currencies and would make Russian purchase of foreign goods prohibitively expensive. It would also damage prospects for credits and cooperation with other countries.
Investors are jittery at the prospect of devaluation, but Radia is guardedly optimistic:
"The ruble is probably going to stay well supported by the central bank, because the bank does have the reserves to mount a much stronger defense of the currency, and to bring about a much more gradual weakening of the currency".
A senior Russian official, Alexander Livshits, said Wednesday that the Central Bank has $17.5 billion in reserves, and that there was no need to touch any of the money received recently from the International Monetary Fund. Livshits, who is a deputy head of the presidential administration, ruled out devaluation of the ruble.
Some fears have been raised that the high short-term rates Russia is offering on its domestic treasury bills (GKO's) will draw away money from other transition markets. One Estonian banker (Mart Toevere of Hansapank) said there would be little incentive to invest in the Baltics if Russian T-bills were offering higher rates. He said that's particularly true because many foreign investors don't distinguish clearly between the individual transition markets, and the risks they pose.