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Russia: Fears Wane, Shadow Lingers Of August 1998 Economic Meltdown

  • Floriana Fossato



Next Tuesday, August 17, will mark the first anniversary of the Russian financial meltdown. In the first of two features, RFE/RL Moscow correspondent Floriana Fossato reports that many of the worst fears following the events of last summer have not been realized. However, widespread pessimism over the future persists.

Moscow, 12 August 1999 (RFE/RL) -- Many analysts who assess the state of Russia's economy one year after the August 1998 financial meltdown focus on the fact that their worst fears have not come true. Some even feel that it was a healthy development for Russia.

Thus, former economics minister Yevgeny Yasin recently told RFE/RL that last August's economic meltdown brought about an important transition in Russia:

"In my opinion, August 17 was a moment of truth for us. We found out that it is impossible to live on debts and impossible to live with an inflated ruble exchange-rate. The market has brought everything back to normal. Now we stand on a more realistic footing. We may like it or not, but it is better to dance to this music than to live on illusions."

A year ago next Tuesday, the Russian government of then-prime minister Sergei Kiriyenko effectively devalued the ruble and defaulted on some domestic debt. Within three weeks, the ruble plummeted from six to 16 to the dollar, banks refused to return clients their savings, most business activities suffered huge losses and foreign investment dried up. As a result, many people lost their jobs, and most of those who managed to keep them saw their salaries reduced or delayed.

When the crisis peaked last August, Russians emptied shop shelves and started stocking up goods, getting ready for the worst. They again showed their endless capacity for enduring cataclysms.

Nor was there any major social unrest. A new Left-leaning government led by Yevgeny Primakov talked much about implementing measures that could have led to hyperinflation. But in the end it avoided a full economic crash by enforcing a policy that some observers called "positive inaction."

As a result, the ruble continued its fall, but finally found firmer ground at a rate of about 24 to the dollar.

Following the ruble devaluation, imports fell drastically --by 46 percent in the first half of this year-- and this helped boost domestic production. Demand has increased for a wide range of domestically produced goods, made cheaper by the devaluation, from food products to construction materials.

Another reason for Russia's improving trade balance is the upward trend of world prices for oil and other raw materials. A barrel of Russian oil was worth only $8.58 in February, but the price rose to $19.34 by July.

Yasin, however, notes that the current positive trend came at a high price and that Russians now are poorer than a year ago.

"It is impossible to say that everything [that happened as a consequence of August 17] had a positive result, because people had great losses. The positive trends we notice now in industry and in several other sectors --the increase of exports, the production growth to replace imports, the improved budget situation-- has been paid for by the people. The population's standard of living has decreased by 25 to 30 percent."

Official figures released in July say that the number of Russians living in poverty has increased from 33 million last year to 55 million this year. This means that nearly four of every 10 people live below the official subsistence level, defined as a monthly income below 829 rubles. That is the equivalent of about $34.

The average monthly wage now equals about $50. It was worth about $200 before last August. The average pension now equals only some $17 per month.

Some economic analysts argue that government policies have contributed little to the current positive trends. Denis Rodionov, an analyst with Brunswick Warburg, told our correspondent that "deeper reforms --structural and institutional-- are still not there." He said that the main policy needs have not changed. He lists them as reform of monopolies, introduction of bankruptcy legislation, reduction of barter practices, improvement of tax collection and restructuring of the banking system.

Others argue another huge problem is what they say is persisting corruption and inefficiency displayed by authorities, as well as by state and private businesses.

The government and central bank program outlining economic policy to the end of 1999 states that Russian authorities are committed to more structural reform. The program was submitted to the International Monetary Fund (IMF) ahead of the fund's long-awaited decision late last month to issue $4.5 billion in new loans to be delivered over the next 18 months. The money is intended to help refinance previous loans that are coming due.

The IMF decision has been of critical importance for Russia. It unlocked additional funds from the World Bank and Japan's Eximbank. It also made possible an agreement with the Paris Club of foreign debtors on postponing the payment of some Soviet-era debts.

But the Fund's new loan was accompanied by unusually strong words from IMF officials. Citing an audit that found Russia's central bank had falsified the size of its reserves in 1996 by secretly channeling funds through an offshore company [FIMACO], IMF first deputy managing director Stanley Fischer said the Fund had "made clear to the highest levels of Russian government" that what happened was "unacceptable".

Peter Westin, an economist at the Moscow-based European Center for Economic Policy, wrote recently in the English-language "Moscow Times" that the IMF decision "was mainly political." He said it "re-confirms the suspicion that creditors view Russia as too big to fail."

One year after the meltdown, most analysts seem to agree that the shadow of August 1998 still lingers.

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