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Russia: Will Asia's Economic Crisis Claim A New Victim?

Prague, 14 January 1998 (RFE/RL) -- As the financial crisis in Asia continues, analysts are anxiously searching for signs that serious trouble is spreading beyond that region. Increasingly, Russia and Brazil are mentioned as possible victims of the Asian virus. Both are among the biggest countries in the world, and both suffer from a perception that their economic systems are incomplete and vulnerable.

In the case of Russia, the nervousness of investors is clearly visible. In renewed volatile trading on Monday (Jan. 12) Russian stocks fell by 14 per cent to hit their lowest level in 10 months. The Federal Securities Commission ordered a 30-minute suspension of the electronic Russian Trade System (RTS) because of the falls, which were attributed to the arrival of more bad news from Asia.

As to Brazil, the influential market analysts, the Economist Intelligence Unit, have just assigned Brazil the lowest place in the growth tables for Latin America, predicting that it will stagnate in the coming year. That's also a direct result of the Asian crisis.

But are these two giants, so different from one another in so many respects, really candidates for an economic meltdown because of faraway Asia? Two German financial experts told RFE-RL that they believe the situation is a lot better than is sometimes portrayed. Juergen Konrad, A Russia analyst With Deutsche Bank Research, says every country can come under threat from the major economic upheavals in Asia, but that Russia is in a far stronger basic position than the East Asian countries which have succumbed in the crisis.

He says that for instance Russia is running a healthy current account surplus and inflation was kept to 11 per cent during last year, a much better result than previously expected. In addition Moscow keeps a tight monetary policy, and restricts the growth of credit. Konrad recalls that the wild and unwise granting of credit by banks in Asia was one of the factors which brought down the Tiger economies.

He says further that structural reforms are continuing in Russia, even if slowly, and this had led to marked improvements in economic efficiency. The economy's competitiveness in productivity versus wages remains good, unlike in Asia, where competitiveness was sharply declining prior to the crash. In addition, the Russian ruble is holding its stability.

He concludes therefore that Russia's real economy has not been affected by the Asian crisis, only its financial markets. As to these markets, he says that in any case inflows of foreign capital to Russia are modest compared with the waves of capital which flowed into East Asia. It was the sudden withdrawal of this massive capital which precipitated the Asian collapse - and he says that same scenario cannot happen on the same scale in Russia. He says the periodic steep falls in Russian stocks are the result of fits of nerves by investors, who appear not to realize that the transition economies are a lot safer than the East Asian economies. Konrad estimates that a real threat to Russia would only emerge if the fall of the Asian dominoes continues so as to include Japan.

Another Deutsche Bank expert, Eberhardt Schultz, reaches basically similar conclusions in the case for Brazil, but for different reasons. Shultz notes that Brazil is much more deeply indebted even than South Korea, having a foreign debt of more than $200 million.

Also, Brazil has been running big budget deficits. Worse, it's currency is considered well overvalued, and is thus a target for currency speculators. In addition, Brazil has high foreign investment, and is vulnerable to the withdrawal of this money. All these are danger signs, but several factors are working in Brazil's favour. One is the very forceful reaction to the Asian crisis by the government in Brazilia. It has doubled interest rates and rapidly brought in an emergency budget package designed to cut public spending. That has stopped the speculative attacks on the currency, and the government is hoping they will not resume.

Shultz says the other factor working for Brazil is that investors there have a much greater risk awareness than those in East Asia had. Latin America went through its own financial crisis in the '80s and early '90s, and investors are aware of the pitfalls, and will not easily panic.

There is a downside to the Brazilian government's firm action, of course. The sudden rise in interest rates and cut in spending has severely dampened growth, and led to a rise in unemployment -- unpopular results, particularly considering that President Fernando Henrique Cardoso and the parliament are facing elections this year. But considering the size of Asia's problems, Brazil's cure seems far better than catching the Asian 'flu.