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Russia: Markets Continue To Plunge, Despite IMF Support

Moscow, 27 May 1998 (RFE/RL) -- The International Monetary Fund has given its backing to recent austerity measures undertaken by the Russian government, but financial markets continued their steep slide today.

President Boris Yeltsin yesterday signed off on deep spending cuts to shore up Russia's shaky finances and restore the confidence of investors. The spending cuts are part of an austerity package drawn up by the government to trim the budget deficit as the cost of domestic borrowing soars. But concerns about a possible debt repayment problem is putting pressure on the ruble.

Jittery investors continued to pull out of the government treasury bill market, where yields on government treasury bills have been pushed up to 63 percent, their highest since late 1996. The stock market plunged more than 7 percent today, bringing it down to its lowest level since January 1997. The ruble also felt the market squeeze, falling to 6.18 to the U.S. dollar yesterday from 6.15 Monday.

The IMF tried to calm markets late Tuesday welcoming Yeltsin's backing of the spending cuts. It said: "Together with the progress being made on structural reform and the firm monetary stance of the Central Bank of Russia, a resolution of the fiscal problem should encourage a revival of growth while assuring a continuation of low inflation and exchange rate stability."

The statement said the IMF hoped to make a decision on releasing a delayed tranche of $670 million in the next few days. The tranche is part of an existing $10 billion loan program which has been frozen because of poor tax collection. The IMF said it is sending John Odling-Smee, director of its European department, to Moscow tomorrow to complete its review.

There has been widespread speculation of an emergency IMF bail-out package ever since markets went into a tailspin earlier this month. But Finance Minister Mikhail Zadornov yesterday denied reports that the government had asked for a stabilization package to ease pressure on the government debt market.

But he left the door open to eventual IMF help, saying "The Finance Ministry has not officially requested assistance from either the IMF or other creditors, although we are considering different options."

Deputy Prime Minister Viktor Khristenko, however, said the possibility of acquiring additional IMF funds had been raised. As he put it: "About the stabilization fund, we have been negotiating possible financial support for Russia both with the World Bank and the IMF."

But some economists believe the IMF wants to see Russia clean up its messy finances before it agrees to additional loans.

The IMF's concerns were partly met by Yeltsin's approval of spending cuts totaling 40 billion rubles ($6.5 billion), but Zadornov said low tax revenues could force the government to slash spending by an additional 22 billion rubles this year.

In addition to the spending cuts, Zadornov and Khristenko outlined a series of steps Tuesday to boost revenues by up to 14 billion rubles this year, including stepping up bankruptcy proceedings and cracking down on abuse of tax free zones within Russia.

Khristenko also pledged to boost tax collection, but previous promises have failed to produce any real changes. The head of the State Tax Service, Alexander Pochinok, underscored the depth of the problem Tuesday when he said revenues were on the decline.

The austerity plan comes as the government is still reeling from a wave of strikes by unpaid coal miners, who called off their protests this week.

While the government managed to appease miners, it failed persuade investors that it has the financial situation is under control.

Paul Iacovacci, managing director of trading and sales at Troika Dialog said: "No one is willing to stick their necks out until they see concrete changes in fiscal policy. People are really afraid of a devaluation."

Russia's stock market has fallen by nearly 50 percent since the beginning of the year, after finishing 1997 as the best performing emerging market in the world.