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Russia: Former Minister Says Economy Paralyzed

Prague, 2 September 1998 (RFE/RL) -- Former Russian Economics Minister Andrey Nechayev says that the Russian economy is in shock and its financial markets are in a state of paralysis. Nechayev, who is currently President of the Russian Financial Corporation, was interviewed yesterday in Moscow by RFE/RL. Nechayev said that the government's decision effectively to devalue the ruble and to default on foreign debt has plunged the country's economy into a grave crisis.

The Russian government has allowed the value of the ruble to decline by nearly half against the dollar since July. The Central Bank today set its exchange rate to just under eleven rubles to the dollar, a decline of 14 percent on yesterday's official rate.

Russia has defaulted on thousands of millions of dollars of Treasury debt and discriminated against foreign investors in the process. It suspended the country's main currency exchange when it ran out of money to defend the ruble. The Central Bank also ordered commercial banks to stop repaying foreign loans for a three-month period. And Russia's stock market has recorded a succession of all-time lows.

Nechayev warned that there is a real danger that the Central Bank will resort to printing money in order to fulfill the government's promise to guarantee savings and to pay wage arrears and pensions. Starting up the printing presses--while ostensibly staving off the immediate threat of social unrest from unpaid workers, disgruntled miners, and disaffected savers-- runs the risk of triggering hyper-inflation, further eroding the purchasing power of the ruble and exacerbating social tensions.

According to Nechayev, the government has effectively "sawn off the branch it was sitting on" by declaring a partial moratorium on the repayment of foreign debts. The government's declared intention to pay wage arrears with the money that would otherwise have gone to redeeming Russia's treasury bonds (GKOs) is unrealistic. The government was already broke, says Nechayev, and by de facto defaulting on treasury bills, has now deprived itself of the possibility of raising more cash by selling future treasury bills.

Nechayev said the government is left with the choice of either dipping further into its reserves, currently standing at 13 billion, or finding the money from its budget.

But a substantial proportion of the 13 billion held in gold is not immediately redeemable in cash. Moreover, the government has already shown its reluctance to reduce its sparse reserves any further when it refused to support the ruble on the currency markets and sparked its devaluation.

The government is still running a budget deficit with revenues, especially from tax collection, still far short of government targets. With the Duma unlikely to approve any belt-tightening measures in this week's debate on the government's anti-crisis measures, it seems there will be no alternative to printing rubles to solve the immediate budget crunch.

Meanwhile, the International Monetary Fund (IMF) said today that Russia is will have to wait before it receives the next tranche from the $22 billion bail-out package organized in July. A team of IMF officials is currently in Moscow to assess the government's adherence to the loan conditions, which have not been made public, before releasing $4.3 billion originally due on September 15. IMF First Deputy Managing Director Stanley Fischer said today on CNN's Moneyline program that "it is clear that Russians will have to do quite a lot before that money can be released."

With a full-blown political crisis accompanying, what Nechayev describes as an "economic catastrophe," it seems that Russia's economic plight will get worse, before it gets better.

(Elena Vyshnevskaya of RFE/RL Moscow Bureau conducted the interview).