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Russia: Concerns, Charges About Its Financial Future

Washington, 9 June 1998 (RFE/RL) -- Russia's chief representative at the International Monetary Fund (IMF) says he's concerned that the financial markets will overreact to whatever the G-7 deputy finance ministers say about Russia after their meeting in Paris today.

The deputy finance ministers of the seven major industrial nations -- the U.S., Germany, Japan, Great Britain, Italy, France and Canada -- are holding a regular meeting in the French capital to discuss a number of global financial situations, including Russia's recent troubles.

U.S. Deputy Treasury Secretary Larry Summers says the session is informal and that there is no intention of putting together an international financial rescue package for Russia at this meeting.

But Russia's IMF Executive Director, Alexei Mozhin, says he's been hearing investors and market observers saying that unless there is an announcement of a "huge package" for Russia, the markets will collapse and money will flow out of the country.

"We have to take these statements with a grain of salt," he told a gathering at the Carnegie Endowment for International Peace in Washington Monday. Many in the markets want large amounts of external financing, he said, but wondered whether there wasn't "an element of extortion" in those statements.

Some investors in Russia, both foreign and domestic, are already reaping "enormous amounts of interest -- up to 60 percent in real terms -- and at the same time want it risk free," he said. "That is not fair."

Mozhin said the latest financial crisis came when the Moscow government was actually doing far more correct things than at any time in the past. He said the new government has dedicated itself to a "draconian" cut in budget expenditures while pushing ahead with reforms and working to reduce debt.

The markets have been concerned about Russia's short term debt, he said, because while it is only about 15 percent of GDP (gross domestic product) or around $70 billion, it is due for repayment in between three and 12 months.

That is a dangerous situation because of the high interest rates the government is having to pay to protect the ruble while financing its operations. It's a "huge burden" on the budget, Mozhin acknowledged, but said that if those interest rates can slowly be brought down, the servicing of the debt will no longer be a problem.

To help that along, he said, the government is going to try to reduce domestic financing and increase both external financing and the money coming from privatization.

One major American investor in Russia, the President of Dart Management group, says the lack of new international financing packages is not what is scaring investment money out of Russia. "The important question to ask at this junction is not 'where's the public sector bailout?,' but rather why is private capital shunning Russia," said E. Michael Hunter.

He told the meeting that private capital is fleeing Russia because a handful of "powerful and unscrupulous men" in the country are bleeding legitimate businesses and stealing all of their assets.

"To put it bluntly," he said, "investors are waiting to see whether the Russian government can wrest control of its economy from the grip of the financial barons that now dominate large segments of that economy."

Hunter said Dart has filed suit against the Yukos oil holding company, accusing it of draining all the resources from two oil production companies -- leaving them nearly bankrupt -- while at the same time cutting minority stockholders out of all the value of their investment.

Said Hunter: "The phrase 'bad corporate governance' is a breathtaking euphemism for what is actually going on in Russia today.