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Russia: Financial Markets Come Under Pressure

Moscow, 2 December 1997 (RFE/RL) -- Russia's financial markets are tumbling as foreign investors flee, putting pressure on the Central Bank's reserves and threatening the stability of the ruble.

Russian government debt securities have been hit the hardest by the exodus of foreign investors. Treasury bill (T-bill) prices plunged yesterday and continued their downward spiral today as yields rose, which will strain the government's ballooning budget deficit. Average yields on T-bills, known by their Russian acronym as GKOs, jumped to 50 percent today from about 30 percent on Friday. The stock market also tumbled yesterday, falling more than four percent.

Foreign investors have been fleeing the bond and equity markets here ever since global financial turmoil hit Russia in late October. Russian officials have said that about 5,000-million dollars will be leaving the T-bill market over the course of December.

Before the crisis, foreign investors made up about one-third of the T-bill market, holding about 20 billion in bonds. The fear is that a mass exodus of foreigners from the market would drain the Central Bank's reserves, which stood at about $21 billion in mid-November. About half of the reserves is believed to be gold. If reserves dip below $10 billion, economists say investors could lose confidence in the Bank's ability to defend the ruble, sparking a run for dollars.

November 11, the Central Bank raised its benchmark refinancing rate, considered a ceiling on GKO yields, to 28 percent from 21 percent. But GKO yields have risen above this level as foreigners and Russian banks leave the market. The Central Bank has resisted pressure to raise the rate further, despite market pressure to do so.

Yesterday, the Bank raised its key Lombard rates to 36 percent, but left the refinancing rate unchanged. The Central Bank's Lombard rates are used for lending to commercial banks. The decision was an effort to shore up the ruble and prevent Russian banks from borrowing from the Central Bank at cheap rates and speculating on the T-bill market. But many market analysts believe it was a half-way measure, and that the Bank must raise its refinancing rate as well. A higher rate would make it more attractive for foreigners, who have left Russia for higher yields in other emerging markets.

The T-bill market has taken a beating mostly because the Central Bank stopped intervening to prop up prices. Some traders said the Bank's move raised fears that it does not have enough resources to support the market.

One T-bill analyst who asked not to be named said: "Now it looks like it can't - rather than it doesn't want to support the market."

The outflow of funds from the bond market might be felt acutely this week. Foreign investors are required to wait at least one month to convert their ruble-denominated GKO holdings into dollars for repatriation. That means investors who decided to get out right after the market crashed at the end of October will begin taking their dollars out of Russia this week.

First Deputy Prime Minister Anatoly Chubais announced Friday that the government is preparing a financial-stabilization package to keep the markets steady, but some analysts said uncertainty over what measures would be taken has added to the downward pressure on bond prices.

Russia's government is seeking outside financial support to deal with the crisis. German Chancellor Helmut Kohl said he had discussed the possibility of additional financial assistance to Russia during talks with President Boris Yeltsin Sunday.

More importantly, the government is trying to reactivate the more than $10 billion loan from the International Monetary Fund (IMF), which has been suspended due to poor tax collection.

The Central Bank issued a statement yesterday saying it expected the IMF to release $700 million by the end of December, which could help the government pay off wage-arrears, as promised, by the end of the year. According to the statement, IMF representatives gave a "positive assessment" of the government's financial stabilization program, after meeting Central Bank Deputy Chair Sergei Aleksashenko and another top Russian official in Washington last week.

But the head of the IMF in Moscow, Martin Gilman, said today that a decision on issuing the delayed tranche would only be taken in February. IMF officials are expected to begin a review of Russia's performance under the loan today.

Aleksashenko has said Russia is not seeking a bailout package from the IMF to shore up the Central Bank's reserves. But some market observers speculated that the visit was billed as routine, because Russian officials were not sure the IMF would agree to make more loan money available.

The IMF's apparent resistance to providing more loan money has not helped boost confidence in the market. Some analysts said a stand-by credit line worth $5 billion to$10 billion would be needed to bolster confidence in the market, and allay investors' concerns that a ruble devaluation is imminent.