Ending Russia's crisis requires tough reforms Ruble devalued: Financial instability increases uncertainty in Moscow and abroad.

August 20, 1998

A STABLE RUBLE and contained inflation were long among the chief achievements of Boris N. Yeltsin's six years as post-Communist Russia's first president.

Just a month ago, he used those conditions as his most potent arguments for foreign loans and credits -- and received a $22.6 billion package that was to assure economic stability. Now, the bubble has burst.

Despite its vast oil reserves and other natural riches, Russia remains an insignificant player in the world's economy. Thus, the most serious impact of Monday's 34 percent devaluation of the ruble (and the effective default on billions in debt) will be inside its borders.

Skyrocketing prices for imported food items and consumer goods could re-ignite uncontrollable inflation. Ordinary Russians, who have kept their savings in banks or under the mattress, could see their nest eggs wiped out. That would be particularly hard on the elderly.

Paradoxically, the impact of the ruble's devaluation may be softened because so much of Russia's economy -- from contracts between industries to dealings among private individuals -- is based on bartered goods and services.

Another point to consider: Millions of Russians have not been paid for months. Overdue wages are estimated to total $10 billion. Yet Russians continue to put up with this non-payment -- and even report to work in factories and offices where little is produced. This suggests that life will go on, despite the latest economic crisis in Moscow.

At the same time, trade unions are angry and talking about a nationwide strike in October. "The devaluation and default on paying government obligations show the complete failure of the government's economic policy," thundered one national union leader.

The Russian government's economic moves have foreign investors worried. But Moscow officials have provided almost no information to portfolio managers holding stocks and short-term Russian government notes.

Details expected to be released yesterday on plans to restructure domestic debt never materialized. They will be delayed at least until next week.

Monday's decision came after the Russian government failed to get additional emergency aid from foreign backers. Russian officials will soon knock again on the doors of major Western governments, asking for more. In the end, those governments are likely to agree to another round of rescue packages to keep the communist-controlled parliament at bay and make sure Russia does not disintegrate.

Those positive responses to the inevitable Russian aid requests ought to be linked to economic reforms President Yeltsin and Prime Minister Sergei Kiriyenko have so far been unable or unwilling to institute. An overhaul of the banking system is essential. So is real tax reform that will guarantee big banks and huge conglomerates -- interlocked and controlled by well-connected Kremlin cronies -- pay their due.

It would be easy to be derisive or dismissive of the financial mess Russians have imposed on themselves. That is not an option, however. Russia still has enough nuclear weapons to destroy the West; the country cannot be allowed to slide into chaos.

! Pub date: 8/20/98

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