IF YOU CAN’T TRUST YOUR BANKER, WHO CAN YOU TRUST?…

Russia seems near the end of the current phase of its prolonged financial crisis. While investors and institutions play “pass the trash” with government debt, politicians stay loose, poised to jump in any direction if and when the crisis reaches the political stage.

Stock, bond, and currency markets have all deteriorated badly. After a week in which trading was twice halted, stocks closed barely above where they were when the market index was launched in 1995. Yields on nine-month government debt rose to 200% before recovering to 150% in thin trading on Friday. The Central Bank reportedly traded rubles at 6.3 to the dollar, the lower end of the trading range, but other banks would not sell dollars at that price and most would not sell dollars at all.

The extreme weakness of the banking system could be exposed at any time. The government for years has funded its deficit by selling short-term obligations to government-owned and commercial banks. In the most recent period for which data have been published (February 1998), domestic banks bought 60% of government bonds. Of those purchases, the state-owned Sberbank accounted for 31%, the Central Bank itself for 49%, and commercial banks 18%. In other words, the government is buying almost half of its own new debt.

But even this shell game won’t work at current prices. The government has canceled three bond auctions, rather than give markets the proof of impending insolvency that borrowing at today’s interest rates would provide. Banks holding outstanding government debt have seen the value of those assets shrink like a cheap T-shirt. With assets dwindling, some banks have missed payments even on interbank loans, and most banks have stopped lending to each other.

Prime Minister Sergei Kirienko offered the familiar complaint that the economy’s fundamentals do not justify the market’s panic. President Boris Yeltsin, playing the role of chief of state of the Prozac Nation, interrupted his vacation to assure anyone who would listen that “everything is going as it should.” But official statistics report that first-half federal outlays exceeded revenues by over $9 billion, while tax collections continue to run below targets.

George Soros, in a letter to the Financial Times, urged a three-part program: a 15%-25% devaluation of the ruble, a currency board to link the ruble to the dollar or the euro, and a $50 billion fund (to be put up by the G-7 countries) to give the currency board credibility. Former finance minister Aleksandr Livshits scoffed at the idea, saying a currency board would not “collect taxes, balance the budget, carry out essential reforms, or pay the wages of federal employees.” It would not, of course. But apparently neither will the government of Russia.

The government’s failing drive to collect taxes is eroding its already slim political base. Important regional leaders, many of whom Boris Yeltsin originally appointed to their posts, are in full flight. The governor of Saratov says the Kirienko team has yet to take even “one positive step.” The governor of Samara opposes a special session of parliament to deal with the crisis and supports a constitutional challenge to the president’s emergency decrees. The industrial and financial tycoons who willingly funded Yeltsin’s 1996 election campaign resist funding the budget deficit. Media magnate Boris Berezovsky uses his newspapers to suggest the Central Bank is speculating in the stock market. Gazprom chairman Rem Vyakhirev a couple of weeks ago called Kirienko a “pipsqueak.”

The tough stand the government took in July, when chief tax collector Boris Fedorov froze Gazprom’s accounts and sent armed agents to the company’s offices to seize assets, lasted only a few days. Last week, Kirienko paid obeisance to Gazprom’s might, meeting with Vyakhirev and expressing admiration for his company’s role in the economy. Also last week, Kirienko met with leaders of the oil industry and softly proposed creating a commission to review their financial status and determine their ability to pay taxes. The government is torn: it needs the financial support of Western lenders and the political support of domestic elites, but it cannot have both and may end up with neither.

NOTES:

Communist leaders in the Duma reluctantly agreed to attend a special session on August 19-20, but they say they will not permit consideration of tax increases or other essential elements of the government’s emergency economic package. Communist Party chief Gennady Zyuganov complains that deputies in some cases do not have the texts of the legislation the government wants them to pass, only the bill titles. … Deputy Prime Minister Viktor Khristenko says the draft budget for 1999 is “very tough” and will face a harder time in the Duma than even the emergency package. President Yeltsin wants the draft sent to the Duma by August 26.

The heads of Russia’s commercial television stations complain that new rules put them at the mercy of state power. Under a May 8 decree, the All-Russia State Television and Radio Company (VGTRK) acquired control of all transmission facilities in Russia, as well as control of 113 regional broadcasting companies. In July, VGTRK got tax breaks and preferential credit not available to commercial stations. VGTRK is now in a position to force private broadcasters off the air. The new rules may be a reaction to the support that Boris Berezovsky’s ORT television gave to General Aleksandr Lebed in his April defeat of the Kremlin-backed incumbent in the gubernatorial race in Krasnoyarsk. Boris Yeltsin, who benefited greatly from control of state-owned media in his 1996 presidential campaign, is said to be furious with media behavior in Krasnoyarsk.