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Monday, 24 August, 1998, 10:34 GMT 11:34 UK
Russia - an economy on the brink
It's been a bad year for the Russian economy.
The weak financial system has been hit by the spillover from the Asian financial crisis.
And the problems that the government has in collecting tax revenues have put international lending programmes at risk.
Now the financial markets are questioning whether current economic policies are sustainable. Already, Russia's central bank had to concede a de-facto devaluation of the rouble, allowing the currency to float in a much broader band than planned.
Russia is one of the world's biggest oil exporters, with $22bn in sales in last year. Its oil and gas companies are some of country's largest industrial concerns.
This year the price of oil has dropped 50%. The reasons are an increase in production, coupled with a slump in demand, especially in Asia. Belated attempts by OPEC to limit production appear not to be working.
The Russian government has lost at least $35bn in revenues as a result.
Growing budget deficit
As the economy has failed to grow, the government has had more difficulty in coping with its budget deficit. And the government's tax-raising powers have been ineffective: only half of the money owed has been collected.
The government is owed most by the biggest companies - the gas and oil giant Gazprom alone reportedly owes $600m. The authorities have attempted to seize the assets of the some of the oil companies which are in arrears.
Government promises to improve its revenues were crucial in securing a further loan from the International Monetary Fund (IMF) of $22bn in July.
But the government failed to agree all the measures it wanted with the Communist-dominated Duma, and has said it will take executive action.
The Duma also wanted to increase expenditure, to protect the poor who are victims of the crisis.
Russia's public debt is not large in absolute terms - its debt ratio is similar to that of other European countries. Much of it, however, was financed by short-term weekly borrowings called GKOs, which the government now wants to restructure.
As worries about the deficit have increased, the interest rates on these bonds have gone up sharply to attract investors, sometimes as high as 150%.
But the problem is that much of the government's cash needs have to be financed by borrowing from abroad. The debt is five times higher than budget revenue, and one and a half times higher than total annual export earnings.
The budget squeeze is so bad that many state employees have not been paid for months. Miners have been particularly upset, blocking the Trans-Siberian railway in protest.
The banking system is particularly vulnerable to disruption. According to the central bank, 75% of all bank liabilities are short-term - held for less than 90 days.
So banks might be forced to raise funds at short notice, as people lack the confidence to take out long-term loans.
And the government failed to raise further funds by auctioning off one of the major oil companies - Rosneft - when foreign investors refused to bid because they thought the price was too high.
As confidence has weakened in the banking system, more people have put their money elsewhere. There is an estimated $70bn in dollar accounts.
The banks themselves were tempted to borrow in dollars as worries about the rouble grew. On August 13, the central bank tried to limit speculation by the commercial banks in dollars by limiting their inter-bank lending to roubles, citing liquidity problems.
The rouble under pressure
For months the government pledged that it would defend the rouble at its fixed rate of 6.26 to the US dollar. But in fact the rouble has slowly devalued over the year.
On August 17, the central bank admitted defeat and allowed the rouble to fluctuate to rate of 9.5 to the dollar.
However, this sudden devaluation will make Russia's debts with the West even harder to pay back as it will take more roubles to meet the claims.
And it could cause Russian citizens and companies to rush to buy dollars, as they lose confidence in their own currency.
This month, the central bank had to spend billions of roubles to defend the currency. Reserves have gone down from $18bn to $17bn. And Russia also has used most of the $4.8bn in funds provided by the IMF to support the currency.
A currency board?
The international speculator George Soros has suggested that a one-time devaluation followed by a currency stabilisation board would be a solution to Russia's difficulties.
The difficulty would be that a sudden devaluation might be unstoppable.
And a currency board would mean that control of Russia's economic policy would pass beyond the government's control.
Currency boards have been successfully implemented in smaller countries like Romania and Argentina.
But they require a degree of political agreement that is currently lacking in Russia, as well as the ability to accept even greater social costs that might be unacceptable.
17 Aug 98 | Business
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