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Russia: Analysis from Washington -- Economic Problems Pose Serious Challenges

Washington, 3 December 1997 (RFE/RL) -- Sharp declines in the Russian currency and stock markets following the economic turmoil sparked by the Hong Kong market meltdown represent both good news and bad.

The good news is that these declines demonstrate that Russia is now sufficiently integrated into worldwide commercial markets that it now affected by developments around the world. And this degree of integration means that its economy and financial institutions and a growing skepticism about the ability of the Russian government to cope with the challenges that turbulence in world markets pose.

If the good news is likely to be the more important in the long run, the bad news is certain to have more immediate consequences on the Russian economy, the Russian political system, and on the international financial and political communities.

Both declines in the Asian markets and growing skepticism about the state of the Russian economy are likely to prompt ever more foreign investors to pull their funds out of emerging markets like Russia's, sometimes to cover their losses elsewhere and sometimes to avoid losses in Russia itself.

Such withdrawals -- and they stand at more than $5 billion in the last few months -- are likely to accelerate as their impact on the Russian economy becomes more significant. That is because these withdrawals are likely to undermine the ruble, force the Russian government to raise interest rates, and cause Russian firms to seek safe havens for their funds outside of Russia.

These economic consequences will have a variety of political effects. They are likely to lead to demands for a new and more nationalist economic policy, one that will isolate rather than integrate Russia further into the international economy. They may force President Boris Yeltsin to drop some officials, such as the embattled Anatoliy Chubais, from his team.

And if these economic trends continue for very long, they seem likely to spark more political challenges to both Yeltsin himself and the government of Prime Minister Viktor Chernomyrdin. Although driven by these economic difficulties, such challenges could quickly spill over into broader attacks on the entire reform agenda.

Because of that possibility, not to say likelihood, Russia's problems pose some serious challenges to the international financial and political communities both immediately and long term. Immediately, they are likely to force the hand of the International Monetary Fund to give Russia some assistance even if Moscow has not met the standards these institutions have insisted on.

And they are likely to force some Western countries, particularly the United States and Germany, to come up with specific aid packages. Although these are unlikely to be large enough to be called bailouts, they are certain to spark political discussions about Russian policy in both Washington and Bonn.

But precisely because of the risks involved of a Russian market meltdown, these latest developments are likely to have a political impact as well. They could for example force the West to adopt a more accommodating policy toward Iraq, allowing it to sell more oil and thus be in a position to pay back more of the thousands of millions it owes to Russia.

Thus the integration of the world economy is likely to lead to some unexpected political consequences. And these suggest that the "day of reckoning" on the Russian economy that Yeltsin postponed on Monday will soon be rescheduled regardless of what he intends -- and that it will, like the collapse of the Hong Kong market, be one not only for Russia.