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Russia: Fears Of Ruble Devaluation Stifle Market, Threaten CIS

Prague, 7 July 1998 (RFE/RL) -- Russia's financial markets are in turmoil amidst fresh setbacks to the Kremlin's revenue-raising efforts. The benchmark stock index, the Russian Trading System (RTS), fell for the second day in a row. The RTS has lost 75 percent of its value since October.

Meanwhile, the ruble is under massive pressure amid fears of a possible devaluation. The ruble closed at 6.239 per dollar on the Moscow Interbank Currency Exchange. That is weaker than the official exchange rate of 6.209 set by the Central Bank.

A trader at the Dutch bank ING Baring said Russia's bond market also is in turmoil as investors flee the market. Today's 15 percent rise in yields came on top of a 10 percent increase yesterday to take bond yields to their highest level in two years. Interfax reports that yields on some bonds reached 120 percent. High yields on bonds are a sign that investors are reluctant to buy the government debts.

Analysts say the market turmoil was triggered by setbacks in the privatization of state oil producer Rosneft. British Petroleum and Russia's Uneximbank announced yesterday that they won't bid in the July 16 tender. Moscow's cash-strapped budget urgently needs the $1.6 billion asking price. But there are no longer any potential Russia bidders who have the backing of Western partners.

Last Friday, the Royal Dutch-Shell Group also pulled out of its joint bid with Gazprom and Lukoil Holding. Bidders say low oil prices have made the asking price for Rosneft too high.

The Kremlin had hoped that the sale of Rosneft would help replenish Moscow's dwindling foreign currency reserves. Shrinking reserves could lead to a ruble devaluation -- a prospect that makes stock market traders worry about investing in Russia.

Those concerns were magnified further yesterday when the managing director of the International Monetary Fund, Michel Camdessus, told the United Nations Economic and Social Council that any further international aid to Russia will "provide only temporary relief" for its economic problems.

The Kremlin is trying to obtain a new loan from the IMF for $10 billion to $15 billion to support its foreign currency reserves and prevent a ruble devaluation.

Garry Kinsey, a trader at Brunswick Warburg brokerage, said today that it is risky for any fund manager to put money into Russia as long as there is still a threat of devaluation. Kinsey said traders will be wary until an IMF loan package is announced. But even then, he said there still will be concerns about a devaluation.

Russia's central bank has raised interest rates to 80 percent in an attempt to defend the ruble. But western experts warn that economic growth in Russia could be stifled if interest rates remain at that level for long.

Meanwhile, the UN's Economic and Social Council said in a report that the greatest potential risks for former Soviet republics and eastern Europe as a whole arise from Russia's uncertain economic situation. The UN report says short-term growth prospects in Russia have deteriorated considerably this year. It says that unless reforms and stability aren't introduced, GDP growth in 1998 could fall below target. It warns that GDP may even decline during the second half of this year. The Council concludes that the underlying cause of Russia's problems are its chronic fiscal imbalance and the way the budget is financed.

It concludes that comprehensive fiscal reform is needed to restore order to public finances and prevent the deficit from growing. Already, Russia's public debt is four to five times larger than annual budget revenues.