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Monday, 24 August, 1998, 10:34 GMT 11:34 UK
Russia tumbles and the world trembles
Yeltsin and Kiriyenko
Mr Yeltsin lost confidence in his reformist PM after devaluation
The economic crisis in Russia has implications reaching far beyond Moscow, St Petersburg and Novgorod. Other emerging markets, and industrialised nations in Europe and North America will be affected as well.

For one thing there are the political implications. Economic turmoil spells political trouble. Some Moscow watchers are predicting that the government and even President Boris Yeltsin might be swept out of office should they fail to get a grip on the situation.

Politicians around the world would be very worried indeed should Russia sink into political chaos.

But of more immediate concern are the economic implications of the Russian crisis.

For some foreign companies and banks much is at stake. The stock market could still collapse. Now that the government and Russia's central bank have failed to defend the rouble, a hefty devaluation could translate into the loss of millions of dollars worth of investments and loans.

Company profits would be hit hard and share prices of Western banks and companies with exposure in Russia would plummet.

As a result investors would think long and hard before committing any new money to Russia.

Emerging markets

For many months, experts hoped that the Asian financial crisis would be confined to the region.

Now that the crisis has reached Russia and threatens to bring the country to its knees, investors and speculators are asking themselves, whether the economic tidal wave will stop here.

Other emerging markets in Europe and around the world could be the next to topple.

dealer on the Johannesberg exchange
Markets wobbled in South Africa
Investors eager to rescue their dollars and Deutschmarks before it is too late could pull out of markets like Poland, Hungary, South Africa, Chile, Argentina and Peru.

This domino effect would not be triggered by bad economic fundamentals, but because of an investors's stampede. The market would be egged on by speculators, who can make money by betting on a market crash and currency devaluations.

Already, there have been tensions on stock markets in Venezuela, Mexico and several other emerging markets.


The first victims, and the ones hardest hit, would be the people living in those emerging market economies.

Tens of thousands of jobs would be lost, and governments would have trouble supporting the welfare system as the collapse of their economies would result in lower tax revenues.

The vicious circle which is currently troubling Moscow - government cash shortage, economic slump and runs on the national currency - would be repeated.

Next in line

Frqankfurt trader
Russian instability has worried European bourses
Some countries have larger investments in Russia than others. German banks, for example, are big lenders to the Moscow government and Russian companies. Companies and financial institutions in Finland and Austria are similarly exposed.

International banks have lent around $72.2bn to Russia, according to the Bank for International Settlements accounting for the period to December 1997.

Lending to Russia - graphic
If the rouble collapses, they all will have to cope with drastic losses and their shares will fall. This could drag down the whole stockmarket of these countries.

German banks will be the worst affected. They have some $30.5bn of outstanding loans to Russia, or nearly 42% of total western bank credit to the country.

Already, the Deutschmark is in poor health because of worries about German investments in Russia.

US banks are in second place, with $7.2bn, followed by French ($7bn), Italian ($4.3bn) and Austrian ($3.6bn) banks.

But other economies could suffer to. In today's globalised economy, countries are interdependent. If one national economy fails, others will suffer.

Wall Street traders, for example, blamed recent losses on the New York Stock Exchange on worries about Russia's economy.

However, some analysts disagree with such a bleak scenario. They say the risk of Russia's problems hurting other economies are "negligible."

In their view, the real problem is Asia, and Russia is just another emerging market getting in the way of the market stampede.

World depression

If the world's stock markets panic, it will not be Russia's fault alone.

Of course, Moscow could have done more to reform its economy, its tax system and its legal system.

But then, Moscow got only into serious trouble when the "Asian contagion" was spreading.

Sloppy financial regulatory systems in Asia and over-eager lending by Western banks are just some of the factors to blame.

Damaged reputations

And finally, there will be a victim which will not hurt, but smart.

The International Monetary Fund has done much to prop up Russia's ailing economy. If Russia fails, its reputation will be in tatters, irrespective of whether it's the IMF's fault or not.

The Fund could literally lose its funding. And when the next crisis comes, there will be nobody there to bail out the victims.

See also:

14 Aug 98 | Business
14 Aug 98 | Business
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