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Wednesday, May 12, 1999 Published at 13:03 GMT 14:03 UK

Business: The Economy

Economic trouble as Primakov goes

Happier days - Yevgeny Primakov and Boris Yeltsin

Political trouble in Russia translates into turmoil for Europe's financial markets. The sacking of prime minister Yevgeny Primakov is no exception.

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Russian stocks suffered badly, falling more than 16%. Dealing had to be suspended for a while when the collapse triggered a safety mechanism which allows traders to cool off.

Gas giant Gazprom saw its share price fall by almost 10%, while shares of oil company LUKoil slipped more than 17%.

Analysts expect the fallout to hit the rouble as well.

European markets were also quick to react. Germany's Xetra Dax saw early gains wiped out to trade 0.4% lower. London also dipped, while Paris fell by 0.5%.

Euro weakness

Marian Bell, Royal Bank of Scotland: 'Another Russian political crisis'
For Europe's single currency, the euro, the crisis in Russia has come at an awkward time. The young currency is trading at record lows, weakened by the strength of the US economy and the crisis in Kosovo.

Recently European central bankers and politicians tried to 'talk it up', but the news from Moscow are a blow pushing it well below a level of $1.07 again.

In London one euro bought about $1.065 at lunchtime.

No reforms, no growth

The official reason for Mr Primakov's sacking has been the state of the economy. Ironically it was economic trouble that got him his job last September.

He and his team replaced a government of reformers, who were caught out when the crisis in Asia and domestic economic troubles combined to force a sharp devaluation of the Russian currency, the rouble.

[ image: Little has changed for Russian shoppers under Primakov]
Little has changed for Russian shoppers under Primakov
Mr Primakov shelved planned radical reforms, arguing for a more gradual approach.

Only on Tuesday, Mr Primakov defended his handling of the economy to journalists.

The pension debt had been halved, the armed forces were fully funded for the first time, doctors and teachers were waiting only two months for their wages instead of five.

Hours later, he was sacked by President Yeltsin, who has become increasingly irritated by Mr Primakov's laissez-faire attitude to the economy.

Urgent measures were needed to stimulate growth, said Mr Yeltsin, and Mr Primakov was clearly not the man to introduce them.

Peter Westin, editor of the Moscow-based Russian Economic Trends, agrees that economic policy was lame, but thinks that was to be expected.

"We have elections this year, and I think any government would have been careful about bringing in radical measures," he told BBC News Online.

"Also the government was a combination of left and centre-left, and the deals that had to be struck meant it would be non-reformist."

Debt repayment was Mr Primakov's biggest problem, along with dwindling currency reserves and a rouble that seemed to be on a permanent downward course. Inflation was soaring and the West had suspended $22bn of aid.

Since September, Mr Primakov has managed to stabilise the economy and halt the decline, but he has not come up with a real strategy for the future.

A main concern has been Russia's inability to get to grips with its debt problem - $100bn from the days of the Soviet Union and another $50bn borrowed since then.

When attempts were made to restructure debts - or in some cases suspend them - creditors were not happy that Russia did not consult them about its proposals.

It was only in March that the International Monetary Fund agreed to reinstate an estimated $4.8bn in loans - exactly the amount Russia is due to repay to the IMF in 1999.

However, even this money is not guaranteed yet. The IMF will pay out only once parliament has enacted certain economic reforms.

The World Bank is also prepared to lend money, $2.3bn over the next two years to restructure the coal mining industry and to establish a social safety net.

Supporters of Mr Primakov say he has handled the economy effectively, considering the condition it was in.

He worked with the Russian parliament, the Duma, to get the 1999 budget adopted in just two months, and won approval for a surplus in the primary budget, before debt-servicing charges.

He has tried to ensure that financial markets could stabilise and that domestic industry had some breathing space for renewed growth.

Mr Primakov managed to halt the devaluation of the rouble, which had lost more than 70% of its value in the month before he took office.

But in the past few weeks, the rouble hit record lows against the dollar, fuelling his critics' complaint that his reforms were not long-lasting.

More tax revenue needed

They also argue that the government must do more to raise tax revenue and curtail social spending.

"There was no serious economic programme, but to be fair to him he put strong emphasis on targeting industrial policy, such as continued support for loss-making industries," said Peter Westin.

"And he did manage to keep Russia out of the abyss. Last August most analysts expected hyperinflation and the recession to deepen."

Talking to journalists on Tuesday, Mr Primakov defended his actions, saying it was not easy to overcome Russia's economic crisis.

"Our government is trying to pull the country out of the current situation with all of its strength, capabilities and professionalism, and this government has significant professionalism," he said.

But ultimately, the sheer scale of the crisis proved too much for Mr Primakov's slow and steady approach.

At least his successor, acting prime minister Sergei Stepashin, has a clear idea of what is required from him.

Not only only must he tackle the unpaid salaries, a banking system in ruins, a gigantic external debt, and meagre Central Bank reserves, he must do it with an impatient Boris Yeltsin at his elbow.

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