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Russia: Central Bank Vows To Defend Ruble

Moscow, 4 December 1997 (RFE/RL) -- Russian Central Bank chairman Sergei Dubinin has vowed to defend the ruble against a devaluation amid reports that the government is negotiating with several Western banks for a $2 billion loan to shore up its shaky public finances.

In Dubinin's words: "The Bank will in every possible way prevent jumps in the ruble rate."

Dubinin yesterday announced that the Central Bank's gold and hard currency reserves are currently about $18 billion. The bank's reserves have fallen by more than $4 billion since the beginning of November, when reserves stood at $22.6 billion.

Reserves have dwindled as foreign investors flee Russia's government debt market, selling ruble-denominated treasury bills for dollars to repatriate profits. A total of $5 billion is expected to be withdrawn by the end of the month.

The run from the T-bill market has sharply increased the government's cost of borrowing and put pressure on the ruble to devalue. The financial crisis comes as the government is scrambling to fulfill a pledge to pay off all wage arrears by the end of the year.

Given the crisis on the local debt market, the government is reportedly seeking a loan worth up to $2 billion from Western banks. The Financial Times reported yesterday that First Deputy Prime Minister Anatoly Chubais has asked four banks, Salomon Brothers, Credit Suisse First Boston, Chase Manhattan, and Deutsche Morgan Grenfell, to raise a syndicated loan for the government.

Chubais' spokesman would neither confirm nor deny the report. But a representative of C.S. First Boston confirmed that they are in discussions with several banks about the government's request for financing.

Bankers outside the deal said the loan could be arranged within weeks to meet the government's pressing needs for cash, but that the government would not be getting any sweet deals in the current world market climate.

Investment banking sources in Moscow said the loan would likely have a one-year maturity, and could be refinanced out of future Eurobond issues next year or proceeds from the privatization of state oil company Rosneft. The size of the loan appears to match the $1.6 billion which the government must pay to cover public sector wage arrears by Jan. 1.

Prime Minister Viktor Chernomyrdin said today that the government is preparing a financial stabilization package, which should be ready within days.

But many economists say the government needs a standby credit line to cover the outflow of funds leaving the bond market and bolster the Central Bank's reserves.

Dubinin tried to dispel fears that commercial banks would not be able to meet their obligations to foreign investors abandoning the T-bill market, saying they had bought enough dollars to cover the outflow. The Central Bank chair met with Russia's top bankers earlier this week to discuss the crisis on the financial markets and reportedly urged them to stand firmly behind the ruble. Dubinin said the Central Bank will raise its refinancing rate next week once the situation on the treasury bill market stabilizes. The refinancing rate, usually considered a cap on T-bill yields, was raised to 28 percent from 21 percent on Nov. 11. The bank already lifted its Lombard rates, at which it lends to commercial banks, to 36 percent.

Analysts said another rate hike would have little effect now that the Central Bank has allowed yields on T-bills to be driven by market demand.

A primary auction of three-month T-bills yesterday yielded just above 40 percent, 12 percentage points above the refinancing rate, but came down a few points in trading today. Still, yields on T-bills have more than doubled since the financial crisis began in late October.

Despite the high yields, the Finance Ministry was unable raise enough money to redeem bills that matured Wednesday. About 1 trillion rubles ($168 billion) was paid out of the budget to cover the difference. As one analyst put it: "The refinancing rate is not crucial at this moment. If the market stabilizes at this level we will probably see some buyers." But he said many investors are staying away because of fears the ruble will devalue.