Russian crisis could upset the world applecart 'It's certainly more important than Monica Lewinsky'

Global economy

August 28, 1998|By J. Leffall | J. Leffall,SUN STAFF

Russia's financial crisis is deepening as the ruble plummets, coal miners strike, the government loses stability and citizens line up outside banks demanding their money.

Average Americans, worried about hurricanes disrupting their vacations or getting their children ready for school, probably haven't given much thought to what's going on in Russia.

Perhaps they should.

"I think we should care for several reasons," said Mark Blyth, an assistant professor of political science at Johns Hopkins University, an expert on the political economies of industrial democracies. "It's certainly more important than Monica Lewinsky. This thing could generate uncertainty in the global market, and that's bad for everyone."

Blyth says that political crises often follow economic turmoil, adding that the effects of a total collapse in Russia could be "disastrous."

"This may be far-fetched, but we need to remember that Hitler took power in the wake of a collapsed economy," he said.

"If there is continued political instability, Eastern Europe could be greatly influenced."

One of the major reasons Russia is suffering is a surplus in the global oil supply.

Weakening demand in Asia, coupled with the slumping price of oil -- now near a 10-year low -- have hammered the Russian economy.

"It's kind of a market psychology issue," said Adam Sieminski, an oil analyst for BT Alex. Brown in Baltimore. "The worry is that China, Brazil, Mexico, Venezuela might be next in terms of devaluing their currency just like the ruble."

Worries about what's happening and what's going to happen as a result of the problems in Russia are what will drive the global market down, Sieminski said.

"All Russia has to sell is gas and oil, and those two aren't moving at all," said Blyth. "Domestically and internationally, people are starting to question the effectiveness of the government."

Sieminski contends that international crises, whether they be the embassy bombings or turmoil in Russia, put a damper on consumer confidence and tend to terrify investors.

"It's a self-reinforcing and negative issue," he said. "The confidence goes down, and then the stock market goes down, and then confidence goes down further because of the market going down, and so on."

Lost relationship

Confidence in Russia may sink further as the government suspended the trading of foreign currency yesterday to curtail the scramble for dollars and keep the ruble afloat.

Richard Howard, a portfolio manager at T. Rowe Price Mutual Funds in Baltimore, said losing a long-term relationship with Russian markets would be detrimental to local investors and to the Russian economy.

"The seeds of investment have been planted in Russia," he said. "While Russia is still a very closed society, people over there want to work and earn dollars and not rubles, especially the way they are now. Without a strong currency, you don't have an effective free-market economy."

Blyth said there isn't an easy solution to the problems in Russia, but there is a lesson to be learned.

"You can't take a totalitarian government and turn it into a democracy hastily," he said. "It's a gradual thing. If you have an economy that wasn't market-driven for 70 or more years and then all of sudden say, 'OK, you can change now,' that doesn't work."

Blyth predicts that if current trends continue, Russians may look to a more authoritarian government for a solution.

"This is why you can't really have instability in Russia," he said, "because this area, which makes up roughly one-seventh of the world's land mass, is strategically important to Europe and the United States."

Strong sentiment

This week, Communist leader Gennady Zyuganov demanded that President Boris N. Yeltsin's newly appointed Cabinet drop the tough monetary course he said was "dictated by the West."

Blyth said disagreements and skepticism among Russian leaders echo those of the Cold War, and may be another hurdle on the road to total democratic reform.

"For the foreseeable future, you might see a strong and growing anti-democratic sentiment in Russia," he said. "This undermines the confidence in the integration of financial markets, and if Russia is out of the globalization loop, there could be some serious economic -- and definitely political -- results down the road."

Sieminski attributes yesterday's sharp decline of the Dow Jones industrial average to worry and uncertainty.

"In some ways, the worries are warranted," he said. "In other ways, it's too soon to really tell."

"But the fact is that if things don't get better, or if things get worse, there is, and will be, definite cause for concern."

Pub Date: 8/28/98

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