Publication: Monitor Volume: 4 Issue: 136

President Yeltsin’s chief economic adviser, Aleksandr Livshits, explained in an interview that the rescue package has three elements. (Ekho Moskvy, July 14) First, the government henceforth will not float any treasury bills (GKOs) of less than one year’s duration. Until the present crisis, the government was turning over US$1 billion GKOs per week, with maturities of one to three months. Second, lenders will be encouraged to switch from ruble-denominated GKOs to dollar-denominated bonds of at least three years’ duration. The first such exchange, worth perhaps US$2 billion will be floated on Friday. Third, the government promises to keep federal spending next year below 300 billion rubles, and to hold the budget deficit to 2.8 percent of GDP (net of interest payments).

The key to the plan is to entice foreign borrowers to refinance the debt at much lower rates. By putting the bulk of the new money into Central Bank reserves to protect the ruble, foreign lenders should not have to worry about a sudden devaluation and should thus be content with interest rates below 20 percent. (The next Eurobond offering will be at 8.75 percent above the US treasury bill rate.) There is little incentive for Russian banks to switch to dollar bonds, however, since most of their business is conducted in rubles. Alfa bank’s Mikhail Fridman said specifically that his bank would not switch its US$150 million of ruble GKOs. It will take several weeks to see whether the strategy is working: On Wednesday, GKO rates were lower than last week’s 100 percent, but were still in the 40 to 57 percent range (depending on maturity).

Also on Wednesday and Thursday, the Duma worked its way through the government’s package of twenty emergency measures. Most of the proposals were approved, including the passage of the first section of the new tax code in all three readings. However, the Duma rejected the proposed new 5 percent sales tax which could be introduced at regional level. This tax could raise 40 billion rubles (US$6 billion) and Deputy Finance Minister Mikhail Motorin made it clear that it was a make-or-break part of the package. At the suggestion of chairman Gennady Seleznev, the Duma sent the proposal to the budget committee and will return to the issue on Friday.