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Russia: Jitters Hit World Financial System

Prague, 28 May 1998 (RFE/RL) -- Russia looks increasingly like it could be the next victim of the Asian crisis. That awareness, spreading like a virus, is rattling the confidence of the world's financial markets, with practically all major stock markets registering losses.

Why is Moscow being shaken by continuing bad news from Asia? It's partly because investors are reducing their exposure to risk, and right now the perception is that Russia is a bad risk, that it's a country which has played out its hand and is left with no more cards to play.

Robin Marshall, Chief of Research at Chase Manhatten Bank in London, in comments to RFE/RL issued a general storm warning.

He says it seems clear now that the big three economies of the Asian region, Japan, China and South Korea, are all deflating and contracting quite rapidly, and that is obviously now beginning to have serious knock-on effects on markets like Russia, South Africa and Brazil. Things could get worse before they get better. All eyes are now upon Russia, and the possibility of an assistance package from the International Monetary Fund. The government in Moscow will also certainly need to come up with fiscal measures quickly to restore investor confidence. Confidence has been lost and there's no credibility left to the policies being pursued.

This is clearly illustrated by Wednesday's (May 27) plunge of more than 10 per cent in Russia's stock exchange index, bringing its fall in value this month alone to 40 percent. Some analysts are calling this a meltdown, others find that language too radical. But in what looked like a desperate move, the government of Prime Minister Sergei Kiriyenko has tripled the main interest rates to 150 per cent in a bid to hold up the value of the ruble.

The problem there is that the government cannot afford to keep such high interest rates for long, so confidence must be re-established quickly or the ruble will nosedive. In addition the Russian Central Bank has low reserves, estimated at $14 billion, and there are fears that Russia, a big borrower on foreign markets, may default on debt repayment.

To avoid default, Moscow will be hoping for increased support from the IMF, beyond the standby sum long agreed. But there is also a major problem here -- the IMF itself has very little money available. Its ready reserves are estimated to be now only a fraction of the sum that the IMF used to stabilize South Korea. A small package would be of questionable value, and to put together a large rescue package would take time, and time is in very short supply for Russia.

Another scenario is that the West could step in with financial support, primarily the United States. That possibility does not seem likely to get off the ground quickly either.

Are the other transition countries likely to suffer from Russia's problems? The answer is almost certainly yes. The next question is how much? Marshall of Chase Manhatten says that Ukraine is the most vulnerable.

Ukraine has the weakest fundamentals. The Czech Republic, Slovakia, Poland and Hungary have stronger fundamentals. But it will be difficult for them, because, as has been shown by Asia, there can be "guilt by association". But markets have generally been more discriminating than before, and despite the evidence of a the present aversion to taking risks, investors do not necessarily view risks in the other countries as being as bad as those in Russia. It's not certain they will suffer as badly as Russia, but one can expect to see pressure continuing on their currencies and interest rates.

Prices on Central and East European bourses have been generally down, and several major currencies -- notably the Polish zloty and the Czech crown -- have declined.

So what can be done to help Russia, given the limited maneuvering room?

Marshall says that in order to raise money the government there should press ahead with the sale of the big Rosneft oil company, which failed to take place earlier this week. That should raise over $1.5 billion. An emergency fiscal package from the government could also restore some credibility. He says that, beyond the possibility of external help, there is not much else that can be done, only to follow sensible policies, with IMF backing.

The next few days will be critical for Russia.