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Russia: Financial Crisis Could Pay Election Dividend For Yeltsin

Moscow, 15 June 1998(RFE/RL) -- Russia still hopes to attract foreign investment, despite, according to its independent state auditor, its refusal to pay roughly one-third of its workforce; a pension payment plan that is contrary to law; orders municipal utilities to cut off the electricity and water of townsfolk because the towns owe taxes; and dispenses about one-third of the annual budget mostly into the accounts of a handful of banks that despatch the cash to safe havens offshore.

On June 5, after a Kremlin meeting, four Russian bankers and six business executives issued a public statement, saying the situation in Russia is one "in which people do not receive the income they have earned. Social tensions are growing. Alienation between various branches of power and inter-clan fighting at the highest echelons result in the growth of political tensions."

Since the signatories run Russia's largest commercial banks, the principal oil and gas exporters, and the country's major media properties, the fact that they seemed to be blaming themselves for "inter-clan fighting" has not been overlooked. But that, says Alexei Piontkovsky, a well-known Moscow press columnist, was just the smokescreen. The fact that the business leaders proceeded to hold the Russian government blameless for the financial crisis that has been gripping the economy for weeks was the real point of the appeal, he noted; as was their backing for government policies from which they hope to profit handsomely.

At the same time, in London and New York, Western bankers have been quoted as saying that leading Russian banks were teetering on the edge of a liquidity crisis of their own. They have begun to negotiate for roll-overs of loans they had taken six months ago, when they and the government were facing an almost identical threat to the stability of the ruble.

Last December, Western bankers holding Russian short-term treasury bonds (known as GKOs) said they suspected Russia's biggest banks had written forward cover (hedge) contracts on the ruble-dollar exchange rate, far in excess of the limits allowed by Russia's Central Bank regulations. So great was the excess, calculated prominent European bankers, that if the ruble were to lose 15 percent of its value, the payouts required of a handful of leading Russian banks would have been so great as to wipe out their capital.

That didn't happen. The banks and the ruble held firm, though for several weeks in January and February, the Central Bank paid the price -- spending $1 billion a week from reserves to support the exchange rate.

By the third week of March, foreigners were back in the market buying bonds, and the Central Bank was rebuilding reserves. Then, President Boris Yeltsin tossed down a political thunderbolt, dismissing the entire government. Yeltsin then named a political neophyte, junior energy minister Sergei Kiriyenko, as his candidate to run the government.

Kremlin sources and Yeltsin supporters tell RFE/RL they believe the President acted to protect his own candidacy for the presidency in 2000 from a takeover by his long-time Prime Minister Victor Chernomyrdin. The political furor that ensued has ignited the presidential campaign a year-and-a-half early. Yeltsin suddenly found himself appealing for support from the same band of bankers and businessmen who had been expecting to back either Yeltsin, or Chernomyrdin, next year -- when they hoped to have more cash.

This year, however, the drop in world oil prices by almost 40 percent since Russia's presidential election in 1996 has meant a dramatic loss of revenues for the oil exporters. Their fortunes, and liabilities, are tied to major banks like Uneximbank and Menatep, whose six-monthly European and American debt service and refinancings depend on rising -- not falling -- oil revenues.

Russian and foreign economists observe that this is not quite the crisis it appears, or the catastrophe it would be in a Western-style economy. For one thing, Russian banks are not lending much to the real economy, with the result that domestic investment has continued to contract every year since 1991. For another, Russia's stock market is a speculator's playground. Companies do not go there to raise capital for their investment plans. The Russian stock market crash of the past two months does not halt investment, because that is not planned anyway.

The real Russian financial crisis was -- and is -- the threat to the ruble.

Economists critical of the government, like Sergei Glazyev, former minister of foreign trade and now head of the Office of Analysis of the Federation Council (upper house of Parliament), tell RFE/RL that falling export revenues ought to have meant a ruble devaluation of up to 20 percent by now. That is also what Western holders of rubles have speculated on for weeks. With 10 billion in cash reserves, the Central Bank is unable to resist if foreign holders of more than 20,000-million in GKO's sell out.

Glazyev is the first to admit, however, that by raising GKO rates to whatever level buyers demand, the Central Bank is enriching both foreign note-holders, and Russia's commercial banks, adding to their short-term liquidity and creditworthiness, while deferring the price the Russian budget must pay until later. Later, according to Finance Minister Mikhail Zadornov, is when foreign confidence in Russian paper will have been restored, and it will be possible to refinance domestic GKO debt through lower-priced Eurobonds. Between now and later, the price Russia's foreign bond issues must pay is also rising rapidly.

Later is all the Kremlin strategy is about. What Kiriyenko realized quickly -- even before his nomination was approved by the State Duma in April -- was that he and Yeltsin had no future, individually or together, unless the major banks and oil exporters were shored up. Kiriyenko's first two actions as acting prime minister were to sign orders providing tax and transit fee reductions for the oil companies, and gold export licenses to the banks.

The fear is that -- bad as the delays in wage and pension payments may be, a sudden spurt in prices for imports that would result from ruble devaluation would be worse. That's because those who are suffering from the payment delays vote 'Communist,' and aren't needed right now. Those who have money to spend, and would be hurt by inflation, were Yeltsin supporters in the last presidential election of 1996.

Not a single regional election in the past three months has been won by a Yeltsin-backed candidate, and the perception that he is too ill to run the country is now a subject for routine media debate. Parliament is close to passing a law requiring the president to submit to a medical check.

Saving the ruble now is a price Yeltsin thinks can be paid -- out of Central Bank and budget funds -- so that he can save his own candidacy later. Between then and now, observers say, the policy Kiriyenko is following is to ensure that Russia's banks and energy companies will earn enough to finance Yeltsin's re-election campaign.