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Russia: Bank Steps In To Protect Ruble

Moscow, 2 February 1998 (RFE/RL) -- Rumors about an impending devaluation of the ruble has prompted Russia's Central Bank to tighten monetary policy, but observers say the government needs to do more to prevent the financial crisis from deteriorating.

The Central Bank announced Friday it would raise interest rates to ward off a speculative attack on the ruble and shore up investor confidence in Russia's shaky markets, which have lost nearly all their gains of the past year.

Central Bank chair Sergei Dubinin said the interest rate hike was aimed at putting an end to rumors of a ruble devaluation, which has put downward pressure on the markets.

As he put it: "This action was aimed directly at staving off the threat of a devaluation...This threat did not exist, except in the inflamed imaginations of some people."

The high interest rates have thrown a wrench into the government's economic plans for 1998, increasing the government's cost of borrowing and raising concerns about how Russia will cover its budget deficit.

The bank raised its key refinancing rate to 42 percent from 28 percent from today, putting interest rates at their highest level since February 1997.

But yields on treasury bills, which usually fall below the refinancing rate, failed to respond to the move, jumping to 46 percent Friday.

The Central Bank's first deputy chairman, Sergei Alexashenko said today that Russia's financial situation was improving and predicted the ruble would remain stable.

The decision to jack up interest rates was generally welcomed by investors worried about the ruble and contagion spreading from Asia. But economists said the government should take bolder moves to prevent Russia from becoming the next emerging market to be hit by a financial crisis.

Rudi Dornbusch, a leading economist at the Massachusettes Institute of Technology, made waves at the World Economic Forum meeting in Davos, Switzerland last when he said Russia could be headed for trouble. As he put it: "The shortlist is Russia and Brazil."

Anxiety about the ruble has driven up t-bill yields and contributed to the steep slide on the equity market, with share prices down 33 percent since the beginning of the year.

The market recovered some ground Monday on the back of a 6 percent increase Friday. But the increases are widely seen as part of the ebb and flow of a highly volatile market rather than any lasting trend. The market is now roughly where it was in February last year.

First Deputy Prime Minister Anatoly Chubais tried to paint a bright picture of the markets while in Davos, saying he expected T-bill yields to come down quickly.

In his words: "The latest wave of the financial crisis will not alter the government's plans." But Chubais acknowledged that Asia's financial woes posed the biggest single threat to Russia.

Dismissing speculation of a mass outflow of funds, Dubinin said foreigners withdrew about $600 million from the government securities market in January. Dubinin said the Central Bank's reserves had dropped to $16 billion from $18 billion dollars on January 1. Dubinin urged market participants not to panic, adding that the ruble had devalued by about 1.5 percent this month in line with inflation. Economists said the higher yields on T-bills may lure some investors back into the market in the short-term, but that concern will soon mount over how the government plans to cover its high cost of borrowing. Analysts say investors want to see the government push through tax reform and cut spending.

With tax collection at about 60 percent of targets in 1997, tax reform is considered essential for the government to bring order to its finances. The government is scheduled to submit a revised tax code to the State Duma today. Hopes are high that the bill will face a warmer reception than last year's code, which deputies rejected.

Economists say the sense of drift in the government's economic policy ever since Chubais was demoted earlier this month had contributed to the sense of malaise among investors.

Maxim Shashenkov, managing director at the Moscow investment bank, Alfa Kapital, said: "There is a lack of coordination on financial policy ....In a time of crisis, there is infighting."

Chubais lost control of the Finance Ministry in a recent cabinet reorganization, which was widely seen as a sign of growing pressure on the reform wing of the government.

Investors have been unnerved by expectations of a cabinet reshuffle and a string of bad news about corporate governance issues, including a leadership struggle at Russia's giant power monopoly Unified Energy Systems.

Some of those concerns were eased last week when Prime Minister Viktor Chernomyrdin announced that Chubais and his fellow reformer, First Deputy Prime Minister Boris Nemtsov, would remain in government. But concerns about the what appears to be a slow-down reforms continue to hang over the market.