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Monday, August 17, 1998 Published at 16:30 GMT 17:30 UK


Business: The Economy

Russian rouble devalued

Russia's financial markets are under pressure

Russia has given up its attempts to defend the rouble, effectively devaluing the currency.

European stock markets reacted with anguish, falling sharply in early trading. However, analysts insisted that the impact beyond Russia would be limited and on Monday afternoon the markets managed to claw back most of their losses.

US support

The United States government, meanwhile, has called on Russia to act swiftly to restore confidence and implement all economic reforms agreed with the International Monetary Fund (IMF).

US Treasury Secretary Robert Rubin urged the IMF to work with the Russian authorities to enhance the prospects for economic recovery.

In a statement the White House said that Washington appreciated the "difficult" situation faced by Russia.

Floating the rouble


Pavroleta Shtereva of MSK Renaissance Capital in Moscow explains her worries about the rouble devaluation
The Central Bank has announced that the rouble will be allowed to fluctuate up to a rate of 9.5 to the dollar after spending £1bn defending the previous rate of 6.3 to the dollar.

The rouble weakened to 6.43 to the dollar in light trading.

On the streets, the dollar was fetching as much as 8.50 roubles.

Inflation pressure


[ image: The rouble has had a rocky ride]
The rouble has had a rocky ride
Experts warned that a weakening rouble would increase inflation pressures as imports got more expensive.

Forcing down the rate of inflation has been seen as one of the major economic achievements of President Yeltsin's government.

Trading was delayed again on the Moscow stock market, and when it finally got underway its spelt more bad news for investors. Shares slumped by nearly 5%, with the RTS index closing at 109.43.


Rob Hayward of Bank of America analyses the impact on stock markets and currencies worldwide
Central Bank governor Sergei Dubinin said the moves were designed to help Russian citizens and hurt the "financial speculators" who had been fleeing Russian markets for months.

Prime Minister Kiriyenko denied any devaluation, saying the measures were "tough but adequate" and necessary because of "the worsening of the situation."

Emergency recall

The government also said it would not pay interest on any foreign debt for 90 days. Short-term government bonds, or GKOs, will be converted into longer-term instruments.

The lower house of Russia's parliament, the Duma, is to meet in emergency session on Friday to consider the crisis and vote on a new government emergency package.

Europe

The U-turn by the Russian government created another volatile day on European stockmarkets.

European bourses initially dropped on the news, however they recovered towards the end of trading.

Top German shares ended up slightly, having fallen more than 2% in early trading.

London shares also managed to end up modestly helped by a strong early performance on Wall Street.

New York shares shrugged off Russia's woes, with the Dow Jones index ending up almost 150 points.

However shares in Paris failed to recover lost ground, ending slightly down.

German banks have lent more to Russia than any other country - around 40% of the total.

But experts discounted the impact of Russia's crisis on other countries. "The risk is negligible for the Germans, and even more so for the others", said Georg Kanders, an analyst at German bank WestLB.

The situation is even less stressful for the other western banks, analysts say. "The risk is tiny for the other countries", commented Neil Crowder at Goldman Sachs in London.

Soros recants

The rouble's trouble had started last week after the influential investor George Soros had called for its devaluation.

However, on Monday Mr Soros claimed that he had been "misunderstood" and that the main point of his remarks had been the idea of setting up a currency board to stabilise the Russian currency.

He said the Moscow government had acted in a timely and courageous manner to arrest the meltdown of the financial system, but warned that the situation was still "dangerous."


[ image: The stock market has been battered by the crisis]
The stock market has been battered by the crisis

Crisis meetings

The Russian Prime Minister, Sergei Kiriyenko, met President Boris Yeltsin to brief him on the plan to tackle the country's financial instability.

Chief debt negotiator Anatoly Chubais has also returned to Moscow for the crisis.


[ image: Ordinary citizens found it harder to get dollars]
Ordinary citizens found it harder to get dollars
And an emergency delegation from the IMF (International Monetary Fund) headed by John Odling-Smee has flown in to the Russian capital.

The IMF has recently agreed to fresh loans of $11.2bn to help Russia out of its difficulties, but there are already questions as to whether this is enough.

The government also announced on Monday a plan to support the 12 most important banks.

The banks are believed to be vulnerable in a devaluation because they have borrowed heavily in dollars.



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