Tuesday, August 18, 1998

More economic trouble ahead for Russia

From staff and wire reports

Russia effectively devalued the ruble Monday -- a move expected to cause hardship for Russian consumers.

A ruble devaluation had been widely rumored because the government faces heavy payments on ruble-denominated debt in coming days and weeks.

The Central Bank said it would permit the value of the ruble to fall about 34 percent -- from about 6.3 rubles to the dollar to 9.5 to the dollar. The price for dollars on the street immediately jumped as high as 9.5 rubles.

"The Russian leadership has taken these steps only after exhausting other options," said Anatoly Chubais, the country's envoy to international financial institutions. He blamed the situation on the Asian crisis and a recent drop in world oil prices.

"Russia has been struggling with significant financial problems since the end of 1991," said professor John Farrenkopf, chair of McMurry University's political science department.

According to Farrenkopf, Russia is a small player in the world economy because it is relatively poor and is still trying to put its economy back in order after the end of Russian communism.

"I wouldn't overdramatize the devaluation, but I wouldn't trivialize it, either," Farrenkopf said. "It could undermine the best reformist government we've had in Russia since the fall of communism."

Economic instability in Russia could lead to social unrest, undoing many reforms. Add Russia's cache of nuclear weapons to the mix, and there is reason enough to pay attention, Farrenkopf said.

Ruble devaluation could also have a domino effect on other emerging markets, Farrenkopf said.

"If the Russian devaluation makes emerging market investors nervous about the stability and fluidity of their investments, they may be more tempted to move their investments out of other emerging markets," he said.

"I don't know what kind of internal consternation this is going to cause," said Terry Pope, chairman of Abilene Christian University's management sciences department. "As people become poorer and more frustrated, you don't know what their behavior is going to be."

Pope said Monday's announcement will prolong Russia's poverty, delaying the day when Russia will be a major consumer of American products.

President Boris Yeltsin, who had cut short his vacation and returned to his country residence outside Moscow, met Prime Minister Sergei Kiriyenko Monday for a briefing, the Interfax news agency reported, citing presidential spokesman Sergei Yastrzhembsky.

The government "needed to take effective steps in the current situation, and we have done that," Kiriyenko said before meeting Yeltsin.

The government also forced a restructuring of short-term debts, saying it would halt payment on government treasury bills and impose a 90-day moratorium on payments of foreign debt.

The devaluation is a tricky political move for Yeltsin's government. It will sharply raise the prices of imports, which account for a large percentage of Russian consumer goods, including more than half the food sold in stores.

However, it was also expected to ease the government's budget crunch, making it possible to pay months of wages and pensions owed to Russians.

Government officials put the best spin on the situation. Central Bank chairman Sergei Dubinin said the government action was "aimed at protecting Russian citizens and domestic producers."

"The government has decided to act in favor of them and against traders in the hard currency and bond markets," he said, according to the ITAR-Tass news agency.

Staff writer Scott Scholten contributed to this story.