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Russia: In Spite Of Devaluation The World Goes On

Prague, 18 August 1998 (RFE/RL) -- Russia's financial crisis has been at the heart of world news this week. Moscow's surprise announcement of a de facto devaluation of the ruble plus other tough measures sent finance experts in many countries scrambling to assess what was happening. Major stock markets suffered declines, the dollar rose sharply against other currencies, and nervousness was evident everywhere.

But almost immediately after the initial shockwaves from Moscow, the world stock markets started to return to an even keel. The key Dow Jones index in New York shrugged off the news even the same day (Aug. 17), and by the following day, the European bourses soared in early trading. In addition, dollar values settled. Fear had evidently dissipated like fog before the morning sun.

That's not to say that Russia's problems are not serious, or that Russians won't be affected by more hardship if their country's economy declines further. But it evidently does show that the international financial community looked, pondered, and decided that it was not deeply threatened by the events in Russia.

This should not be taken as a sign that the outside world doesn't care about Russia and its sufferings. It does show however that the market is taking what it considers to be rational economic decisions on the evidence available to it. Thomas Mayer, chief economist at Goldman Sachs in London gives his assessment:

"Market participants quickly came to the conclusion that this is a serious problem for Russia, but is not a serious problem for the world economy, because the trade linkage between Russia and the rest of the world are not that big. For instance, only about 2 percent of German exports go to Russia, and for the Central European countries -- such as Poland -- the trade share in total exports is between 3 and 8 percent."

In the banking sector, the country most exposed is Germany, which is Russia's biggest trade partner, followed by Swiss and Austrian banks. German banks have on loan to Russia the vast sum of $30 billion which, under the current circumstances, could represent a major risk. But the great majority of the loan exposure of private-sector banks is covered by credit guarantees from the German state, or is held directly by public sector banks.

As for the remaining money which is not covered by guarantees, the banks have already made provision for more than half the total -- meaning funds have been set aside to cover the possibility that the Russians cannot pay. So what might have been a difficult situation for the German banks is largely neutralized.

And in considering Russia's importance to the world economy, it is easy to overlook the fact that although the country itself is vast, its economy is a comparative dwarf. With an estimated gross national product (GDP) last year of some $460 billion, it rates behind tiny Netherlands in the GDP stakes.

The events in Russia illustrate some reassuring points about the international financial market itself. Since the Asian financial crisis broke last year, there has been a great deal of concern in all quarters that the negative influence of the Asian crisis could spread and plunge the rest of the world into recession, particularly if Japan and China are increasingly caught up, as Russia has been. As a result of these worries, stock markets over the past year have been unsettled and volatile, even where they have made gains. Analysts have expressed concern that investor confidence is at stake, and that pessimism fueled by nervousness could bring increasing disruption to markets, which would eventually be to the detriment of all countries in the global marketplace.

The markets' reaction to Russia however points in quite the other direction. Mayer of Goldman Sachs explains:

"There is always a short-term reaction on financial markets which may be not always appropriate, but in a slightly longer time horizon, if you give markets a week or a month, they usually come up with an appropriate assessment of the situation, and an appropriate valuation of financial assets. So the Russian events are just an example that financial markets are actually not driven by headless herds of speculators who jump to one side or the other on the basis of a single event. No, I think they come up with an assessment of what the event means and act accordingly."

If one can speak of good news stemming from bad news, this might be it.