RUSSIAN STOCK MARKET UP BUT POSSIBLE DEBT CRISIS LOOMS.

Boris Yeltsin’s resignation and Vladimir Putin’s accession has given Russia’s ailing stock market a new lease on life. Yesterday, the value of shares traded reached US$27.94 million, approaching the record high–US$33.25 million–recorded on July 28, 1998, just a few weeks before the crash of the ruble and debt default. Moscow brokers reported a rise in orders from Western investors, something of a vote of confidence in the new head of state. Just prior to Yeltsin’s resignation, Putin released a programmatic document outlining what some are calling a “paternalistic” capitalist model for Russia’s development, which would strengthen the state’s regulatory role while guaranteeing such basic capitalist ingredients as the protection of private property and investments. This undoubtedly was music to the ears of many in the international financial community, and could help Russia to complete successfully its negotiations with the London Club of creditors over rescheduling its Soviet-era debt. Helena Hessel of Standard & Poors, the U.S. rating agency, was quoted as saying that Putin’s program resembled the industrial policy pursued by Asian states like South Korea in the early stages of their development (Russian agencies, January 6).

Yesterday, however, Putin took a step which is bound to cause Western financial institutions some concern. Following a meeting with Russian Central Bank Chairman Viktor Gerashchenko, Putin approved a proposal offered by Gerashchenko which will require Russian exporters to convert 100 percent of their hard currency earnings into rubles. Putin called it a “step in the right direction,” but added that the move should be carried out without stepping up currency and export controls or hurting exporters (Russian agencies, January 6). On January 5, Gerashchenko wrote a letter to Putin, in which he argued that the measure was necessary in order to prop up the ruble and hold down inflation without revising the 2000 budget, which envisages relatively low inflation (Moscow Times, January 6). In the wake of the August 1998 financial crisis, after then Prime Minister Yevgeny Primakov appointed Gerashchenko, a Soviet-era banker, to head the Central Bank, Gerashchenko increased the portion of hard currency export earnings which must be converted to rubles to 75 percent. At that time, some Western observers viewed the move as a distinctly retrograde step reminiscent of Soviet practice. The International Monetary Fund (IMF) has been withholding a US$640 million installment from its promised US$4.5 billion loan to Russia due to Russia’s failure to move forward in liberalizing its economy, and the new regulation can hardly be called a step toward liberalization. It will be interesting to see the Fund’s reaction to the decision, given that Putin’s doctrine of modified state intervention in the economy has apparently raised little concern among the Western governments who fund the IMF.

Meanwhile, there are signs that a storm cloud may be hovering just over the economic horizon. Mikhail Delyagin, a former Russian government economist who now heads the independent Institute for Problems of Globalization, warned that the country’s budget crisis has been worsening since September, with budgetary shortfalls growing from 13 percent in October to possibly as much as 25 percent in November (official statistics on November are not yet out). According to Delyagin, wage arrears have been growing in a number of regions. Delyagin warned that the boost to domestic industry brought about by the August 1998 ruble devaluation has worn off, and that the high world prices for oil, another major boost to the Russian economy, could head south in the early months of this year. As a result, Delyagin warned, Russia could soon face a debt crisis worse than in 1998 (Nezavisimaya gazeta, January 6).

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