Wednesday, August 26, 1998

Russia announces debt structuring, mulls coalition with Communists

By MAURA REYNOLDS Associated Press

MOSCOW - The Russian government battled Tuesday to pull the country out of economic and political crisis, putting off its debt repayments and signaling that some hard-line opponents may be given top posts.

However, in a sign that hopes of a quick recovery are crumbling, the ruble plummeted 9.2 percent in trading Tuesday - its biggest one-day plunge in nearly four years.

The currency closed at 7.86 to the dollar, or 12.72 cents, down from 7.14, or 14.01 cents, Monday. Trading was suspended twice when the Central Bank was overwhelmed by demand for dollars.

Russia's crisis has raised alarms around the world. President Clinton phoned Yeltsin and expressed support for his efforts to fix the economy, White House officials said. But they indicated that the United States' interest is in promoting reform, not endorsing individual leaders.

Clinton is scheduled to arrive in Moscow in less than a week for a summit with Yeltsin.

The Russian government has been struggling to contain the crisis, which began in early summer when the stock market went into a deep skid, and hit a low point when the Central Bank effectively devalued the ruble last week. The Russian economy has been wracked by financial turmoil in Asia and the worldwide drop in oil prices, Russia's main export.

Last week, the government also effectively defaulted on its short-term debt, announcing that holders of $40 billion in treasury bills - $11 billion of it held by foreigners - would have to accept a new repayment plan.

Acting Prime Minister Viktor Chernomyrdin approved that plan Tuesday. Under the terms, investors whose bonds have matured will have the option of swapping them either for long-term, dollar-denominated paper with a very modest return, or much higher-yielding paper denominated in rubles.

Announcement of the terms had been postponed twice under pressure from foreign investors who feared the restructuring would favor Russian commercial banks.

Analysts said the restructuring would be painful for investors who had been attracted to Russian securities by their sky-high interest rates.

In New York, Dave Durrant, a global strategist with IDEA Inc., said the new bond will be "a millstone around (an investor's) neck for the next three to five years."

Investors, he said, were trading in highly convertible short-term bonds with interest rates of 80 percent or more for illiquid instruments yielding 20 percent to 30 percent interest rates.

"Now as an investor, you've given up all of the liquidity, you're receiving a lower interest rate and you have to suffer with all of the ruble risk beyond now and the maturity of the bond," Durrant said.

Over the weekend, Yeltsin reinstated Chernomyrdin, the longtime former prime minister he fired five months ago, in the hope that a well-known face and political veteran will restore confidence at home and abroad. His nomination must still be approved by parliament.

With unusual candor, Chernomyrdin accepted partial responsibility for the crisis.

"Serious mistakes have been made, in particular by myself when I was prime minister," he said Tuesday, according to the Interfax news agency.

Moreover, Chernomyrdin declined to sling mud at the man who succeeded him as prime minister for five months: "It is not the fault of Sergei Kiriyenko that (his Cabinet) was hit by numerous negative factors which they could not manage."

Chernomyrdin suggested that one way to mend relations with the hard-line lower house of parliament, the State Duma, would be to give in to their calls for a "government of accord" with prominent jobs given to Communists and other Yeltsin foes.

The Communists, parliament's largest faction, have long called for such a coalition government.

Yeltsin has repeatedly rejected those demands, though in previous political crises he has appointed a few Communists to the Cabinet. This time, Chernomyrdin appeared to indicate the offer would be more sweeping.

Only three members of the Communist Party have served in the Cabinet since the Soviet collapse.

Other developments Tuesday:

- Stocks rose in thin trading. The Russian Trading System index closed at 88.38 points, up 2.3 percent from Monday's close.

- Three of the nation's leading banks - Oneximbank, Bank Menatep and Most Bank - announced a merger in an apparent attempt to prevent an acute liquidity crisis by combining their assets. Most Russian banks have found themselves in a difficult position after last week's devaluation because they are heavily dependent on ruble assets.

- The French petroleum company Elf Aquitaine decided to abandon a proposed alliance with Russia's Sibneft worth $500 million because of economic instability in Russia and low world oil prices.