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Russia: Financial Crisis Deepens

Moscow, 2 June 1998 (RFE/RL) -- Russia's financial crisis is deepening despite a pledge from U.S. President Bill Clinton that Washington would back an international bail-out for the government to stabilize the economy.

Clinton said in a statement on Sunday: "The United States endorses additional, conditional financial support from the international financial institutions, as necessary, to promote stability, structural reforms and growth in Russia."

But Russia's anxious markets were clearly expecting more. Shares tumbled more than 9 percent yesterday, but have begun recovering some ground today, rising about 2 percent. But the market is at its lowest level since October 1996. Yields on government bonds rose to 75 percent, pushing up the government's cost of borrowing and putting pressure on the ruble. The ruble yesterday sank to 6.17 to the dollar from 6.13 on Friday.

The stock market has plummeted about 45 percent over the past month as investors pull their money out of Russia in fear of a ruble devaluation. The Central Bank hiked interest rates to 150 percent last week to make it more attractive to hold rubles, but the dramatic move has failed to halt the market slide. The crisis has led to growing calls among investors for an emergency package to stave off an Asian-style financial meltdown.

The International Monetary Fund last week said it would release $670 million under its existing $10 billion loan to Russia, but failed to heed market calls for a larger stabilization loan to prop up the Central Bank's dwindling reserves.

Officials from the U.S. and the IMF, however, are adopting a wait-and-see approach. IMF first deputy managing director Stanley Fischer told reporters in Tokyo on Monday: "We are talking with the Russians continuously."

State Department Spokesman James Rubin said late Monday that Washington was working with its allies and international financial institutions on ways to help Russia through the crisis.

U.S. Deputy Treasury Secretary Lawrence Summers warned that Russia's troubles could ripple through the former Eastern bloc and beyond. In his words: "Russia's problem has the potential to become in turn Central Europe's and the world's." He said it was critical for Russia to move ahead with economic reforms.

Former economic policy chief Anatoly Chubais met with Summers and officials from the IMF in Washington last week, adding to the swirl of rumors that Russia is negotiating terms of an emergency bail-out loan for as much as $10 billion.

But Russian officials continue to deny that any assistance is being sought. Prime Minister Sergei Kiriyenko said in an interview on Russian television Sunday night: "There is no such need right now. The Central Bank's reserves are more than $14 billion. This is more than enough to keep the situation on the financial markets under control."

Kiriyenko, Finance Minister Mikhail Zadornov and other senior economic officials met with 15 top investment bankers in Moscow Monday in a bid to restore confidence in the stock market. But both bankers and government officials denied that a loan was discussed.

Sergei Boboshka, president of Chase Manhattan Bank in Moscow, said after the talks: "It was not a meeting to ask for money."

Chase is among a handful of banks, including Deutsche Bank, J.P Morgan and ABN Amro, rumored to be involved in talks on a loan to the government worth several billion dollars. But Boris Jordan, the head of MFK Renaissance said Western banks were unlikely to lend to the Russian government without backing from the IMF or Group of Seven industrialized countries.

The IMF is hoping that the government's fiscal austerity package, which includes slashing spending by 74 billion rubles ($12 billion), will persuade panicky investors that Russia's public finances are under control.

Pushing ahead with tough new cuts, Kiriyenko Monday ordered the cabinet's staff slashed by 30 percent. The government's belt-tightening plan includes measures to boost revenues, including a major crackdown on tax debtors and stepping up bankruptcy proceedings. Gas monopoly Gazpromalone coughed up 1.200 million rubles (195 million dollars) in back taxes last week, while national power company Unified Energy Systems paid 600 million rubles.

Boris Fyodorov, the new chief of Russia's tax service, told an investor conference: ""Nobody believes it can be done...But the political will is evident at the government level." But he also added that international financial institutions need to do more to help the government.

The Central Bank's first deputy chairman Alexander Potyomkin said Monday that the government was considering five different sources of outside financial assistance, including financing from both the IMF, G7 and private banks. In his words: "The improvement of fiscal policies is insufficient in the current circumstances."

Potyomkin said outstanding government treasury bills currently total $70 billion, including about $22 billion held by foreign investors. The Central Bank's cash reserves, minus gold, are roughly $10 billion dollars and would not be enough to cover a sudden withdrawal of foreign investors, who would need to convert ruble-denominated T-bills into dollars for repatriation.

As Gleb Shestakov, head of Global Fund Management, put it: "The mood is gloomy. The mistake is in the permanent repetitions that the government is not asking for additional loans. They need them tomorrow."