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Russia: Financial Crisis Is Seemingly Easing

Prague, 4 June 1998 (RFE/RL) -- Stocks rallied today at Russia's financial markets for the third day in a row on the news of a successful Eurobond issue, a fall in government treasury bill interest rates and expectations of a Western emergency bail-out package.

At mid-day the benchmark Russian Trading System (RTS) index was over three percent up on yesterday's close and expected to go higher before the end of the day. Equities have now gained more than 23 percent in the last two days after falling on Monday to levels not seen since October 1996. Even so, the Russian stock market is down about 50 percent from the beginning of the year, in sharp contrast to the last year's record growth of 98 percent.

The Finance Ministry has said that yesterday's $1.25 million Five Year Eurobond.issue had been a success. The sale followed three auctions of government treasury bonds intended to raise enough cash to redeem $1.2 million dollars worth of maturing government treasury bills which fall due this week. Although the funds raised at the auctions fell $250 million short of the sum required to keep up with government payments on its existing debt, the auction was deemed a success by investors. The head of Russia Financial News agency, Rhod MacKenzie told RFE/RL that "Western investors interpreted the successful auction of the government treasury bills as a sign that confidence is returning to the market-place."

The lowering of the treasury bill interest rates to under 50 percent bolstered market confidence in the government's ability to service its debts and defend the value of the ruble. Some traders are expecting an announcement soon by the Russian Central Bank that it will lower key interest rates to around 80 percent down from the current 150 percent. The government failed in its three previous weekly debt auctions to raise all the cash it needed. In less than one month, the Central Bank's hard currency reserves have dropped from $24 billion in early May to $14.6 million owing to efforts to support the ruble. Last week the Central Bank was forced to triple its key refinancing rates to 150 percent to stave off a collapse of the ruble.

Almost a third of the government's expenditures this year are ear-marked for interest payments. The higher the bond rates, the greater the budget deficit. Last week the government of Prime Minister Sergey Kiriyenko is believed to have agreed a five percent budget deficit target with the IMF. This assumes T-bill rates of around 35 percent.

Meanwhile, there are expectations that Russia will be offered a rescue package from the International Monetary Fund or the G-7 nations. But so far both bankers and government officials have denied that any discussions of an Asian-style bail-out package have been discussed.

Kiriyenko said yesterday before leaving for France that the financial situation was under control. Also yesterday Finance Minister Mikhail Zadornov denied a Japanese newspaper report that Russia will ask the G-7 nations for a $10 billion dollar loan to ease the government's cash-flow crisis.

Finally, the head of the federal bankruptcy agency yesterday announced a series of measures designed to speed up bankruptcy procedures. Georgy Tal said at a press conference in Moscow that his agency will be targeting tax debtors and give defaulting companies three months to sort out their finances before placing them in official receivership.