Russians fear slide in value of ruble Government to let currency drop, change terms of its debt

August 18, 1998|By Kathy Lally | Kathy Lally,SUN FOREIGN STAFF

MOSCOW -- Russia's darkening economic crisis left the lofty realms of international finance and Kremlin politics yesterday and began to confront the ordinary citizen.

After days of denying they would allow a devaluation of the ruble, Russian leaders in effect did just that. The Central Bank announced it would allow the ruble to lose up to a third of its value this year, letting it fall from 6.3 to the dollar to 9.5 to the dollar.

A fall of the ruble will spread the financial pain from the prices of stocks and bonds, which few Russians own, to consumer prices, which they all pay.

"It's a catastrophe," said Nikolai Golovin, a 38-year-old Muscovite who has been struggling to build a small business importing children's clothes from Turkey. "This will destroy everything I have been able to build up.

"It will hurt everyone. Look around. Do you see anything for sale that isn't imported? Milk and potatoes. That's all we produce here now."

In other measures to avoid government default, officials said they would "restructure" or postpone payments of domestic debt, promising to announce details tomorrow. The government imposed a 90-day moratorium for payments on banks' international loans but said government foreign debt payments will not be affected.

Only five weeks ago, the International Monetary Fund approved $22.6 billion in loans to help Russia defuse the gathering storm. The stock market has lost 75 percent of its value this year; investors are so nervous about government bonds that interest rates have risen to 200 percent without attracting buyers; rumors are rife that numerous banks are in deep trouble and ready to collapse.

But the promise of IMF loans apparently was unable to deliver what Russia needed most: investor confidence and higher revenues, which were sapped by low tax collections, falling price of oil -- Russia's most valuable export -- and fears inspired by the Asian financial crisis. The country was having more and more difficulty raising the money to pay off billions of dollars in debt, threatening to exhaust its foreign exchange reserves of $17 billion.

Anatoly Chubais, President Boris N. Yeltsin's special financial envoy to the West, said Russia had no choice but to take the course it did yesterday. "In response to the threat of financial panic, the government was forced to take extraordinary measures."

Prime Minister Sergei V. Kiriyenko said Russia was not reneging on promises it had made to the IMF for reforms but was simply moving to another line of defense.

"The deteriorating situation forced us to retreat to the second line of defense in order to fulfill the program that we adopted," he told a news conference yesterday.

Russia seems to live on the brink of collapse, though so far it has been able to catch itself at each last possible moment before slipping into the abyss.

The last few months, however, have brought more and more pressures. Since May, coal miners have been striking and blocking railways, demanding back wages that sometimes are a year or more late. Their industry, like too many others, has been straining under the load of Soviet-era inefficiencies, unable to rebuild, sapped by corruption and mismanagement.

The stock market was sliding too, hurried along first by the state Duma, which passed a law limiting foreign ownership of a huge electric conglomerate after that limit had already been surpassed and then under pressure from the Asian crisis.

By the end of May, the government was taking drastic measures to shore up the ruble and stop a panicked attack on the financial markets: The Central Bank tripled the interest rate it charges loans to banks, from 50 percent to 150 percent.

Last week, billionaire George Soros publicly suggested that Russia devalue the ruble, saying "the meltdown in Russian financial markets has reached the terminal phase."

Fear was making it harder and harder to find dollars by the end of the week. Many Russians routinely exchange their rubles for dollars as a hedge against inflation, and rumors of devaluation turned that inclination into an imperative.

Some exchange offices raised their rates to 7.5 rubles to the dollar yesterday from last week's 6.2 to 6.4 rubles, but only a few had any dollars to sell.

At the time, Yeltsin was on vacation. So was Chubais. So was the head of the Central Bank. Friday, Yeltsin assured the public there was no reason for him to return from vacation and insisted the ruble would not be devalued.

Saturday, he returned from vacation. Yesterday, the ruble began what many observers expect will be a quick trip downward to 9.5 to the dollar.

Kiriyenko insisted it wasn't really a devaluation, just a widening of the band within which the ruble would fluctuate.

Golovin, the small-business owner, found himself unable to believe their assurances. He has paid for the clothes he imports with dollars. The Moscow stores that buy them pay him in rubles, and have been delaying their payments while they wait to see what happens. When they do pay him, he expects the rubles to be worth a lot less than they were at the time of the sale agreement.

Instead of building up his business, he's afraid he'll be watching it slip away.

"Once again, they're stealing my money," he said.

Pub Date: 8/18/98

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