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Thursday, August 13, 1998 Published at 14:41 GMT 15:41 UK

Business: The Economy

Russia faces meltdown

Russian financial markets crashed on Thursday as investors lost confidence in the economic reform process.

[ image: George Soros thinks devaluation is inevitable]
George Soros thinks devaluation is inevitable
The trouble began when billionaire financier George Soros warned that the turmoil in Russia's financial markets had "reached a terminal phase."

Stock markets in Europe tumbled as dealers feared that yet another emerging market was going into meltdown.

And US credit rating agencies Standard and Poors and Moody's Investors Services downgraded Russia's foreign debt - which will make it more expensive to borrow abroad. They both said the outlook remained negative.

Government stands firm

The Russian government said it would stick to its existing economic policy, and Communist Party leader Gennady Zyuganov said that he would, after all, agree to a special parliamentary sesson as early as next Monday.

"An absolutely urgent situation has arisen," Zyuganov said. "If there is devaluation of the rouble, a collapse of banks and the impoverishment of the people will follow."

BBC Moscow Correspondent Andrew Harding: 'Something is going to have to give'
Trading on the Russian stock market was suspended for 35 minutes on Thursday for the second time this week as share prices crashed soon after the market opened.

After trading resumed the RTS index stood at 95.4 down 11.8% on the day. The index ended down 6.49% at 101. It has lost more than 80% of its value so far this year.

Tom Brackenbury, a trader at Rinsko Plus, said the market was falling on the "fear of default both of Russia and its institutions."

Government bonds sidelined

[ image: Russian banks are having trouble with dollar loans]
Russian banks are having trouble with dollar loans
Purchases of government short-term bonds, or GKOs, ground to a halt as dealers waited for news. Last week interest rates on government bonds went up to 140%.

"There is no trading on the GKO market. No one knows what to do. The market is waiting for a response of the financial authorities," one of the dealers said.

The Russian central bank said that the inter-bank market, where large commercial banks lend to each other overnight, was cripped by acute liquidity problems.

It said it would limit foreign currency purchases for such inter-bank lending.

But the Russian government said that the only way to restore confidence was to stick to its existing economic plans.

Sergei Kiriyenko, the Russian Prime Minister, said, "Even if the markets are closed to us, we will calmly finance August and September and will ensure full payment on the state debt."

Soros warning

Mr Soros, one of the world's most influential investors, wants the rouble to be pegged to the US dollar or a European currency.

Former Chief Economist to the World Bank in Moscow, Charles Blitzer: 'It is a good suggestion'
In a letter to the Financial Times newspaper, he also called on the Group of Seven industrialised countries to provide a further $15bn to shore up confidence in the country's troubled financial system.

His outburst sent shockwaves through Russia's financial markets, which are already reeling from growing concerns about the country's economic future.

[ image: The Russian rouble is under pressure]
The Russian rouble is under pressure
Russia is facing further economic turmoil despite promise of a $22bn financial bail out lead by the International Monetary Fund.

Russian shares have collapsed in recent months amid fears that the government will struggle to pay off its debts.

The government has some $20bn in short-term debt that must be redeemed by the end of the year. It has been finding it difficult to collect taxes, especially from the energy companies whose profits have been hit by the fall in the oil price.

Devaluation 'best solution'

Mr Soros said: "The banking system is, to all intents and purposes, pretty well wiped up."

He believes that the best way to resolve the crisis is for a 15-25% devaluation of the rouble and the setting up of a currency board.

Mr Soros said devaluation was needed in the wake of the huge decline in oil prices, one of Russia's main exports, and to reduce the amount of reserves needed for the currency board.

Devastating consequences

"Unfortunately, international financial authorities do not appreciate the urgency of the situation," Mr Soros said.

He warned that if action to resolve the crisis was delayed, the alternatives were either that the government defaults on loans or the economy suffers from hyper-inflation.

"Either would have devastating financial and political consequences," Mr Soros said.

He believes that the currency board would require $50bn of reserves to succeed.

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