Last week, Russian financial markets appeared to be on the brink of an Asian-style crisis. Yields on one-year treasury bills, which fell to 17 percent in October, climbed to 46 percent as buyers grew fearful that a ruble devaluation was imminent. Foreigners hold about $16 billion of Russia’s $50 billion treasury bills, and seemed to be cashing out in large numbers. The stock market too has been affected, slipping 33 percent since January 1. (Russky telegraf, January 31, Rossiiskaya gazeta, 30 January)
Faced with spiraling interest rates, the Russian Central Bank (RCB) stopped the sale of federal bonds (OFZ’s) on January 28. This is the first time this has happened since the bank crisis of August 1995. On January 30, and effective February 2, the RCB raised its refinancing rate from 28 to a punitive 42 percent — signaling that it was putting defense of the ruble exchange rate ahead of its efforts to float loans at reasonable rates.
The rise in interest rates, if sustained, will choke any incipient revival of investment that may have occurred this year. A sustained rise will also make it very difficult for the government to finance its budget deficit. The federal deficit last year was 6.1 percent of GDP (with revenues amounting to only 11.3 percent of GDP). (Ekonomika i zhizn, No. 2, January) Last year, debt servicing accounted for 24 percent of federal spending. Higher interest rates will cause this ratio to rise to unsustainable levels. Yet it was only on Monday of last week that President Yeltsin launched the government’s 12-point program for 1998. And one of those points was a pledge to bring bond rates down to the 17-18 percent level. (Finansovye izvestia, January 27)
RCB chief Sergei Dubinin blamed the interest rate hike on panic buying of dollars by Russian commercial banks. He described the hike as "dramatic" but insisted that the economy is not in "crisis." Further, he predicted that rates will soon fall below 30 percent. Reports over how much the RCB has spent shoring up the ruble, however, are contradictory. Hard currency reserves seem to have fallen from $24 billion a month ago to around $18 billion at the end of last week.
It appears, then, that Russia has finally caught a whiff of the "Asian flu," after having said for months that it would be unaffected by the Asian crisis. Foreign investors, fearing that a devaluation could wipe out their profits, are turning this into a self-fulfilling prophecy by withdrawing their cash. Russian banks are also vulnerable due to loans and futures contracts that must be paid in dollars. An alternative explanation: Investors signaling their displeasure at the marginalization of Chubais and Nemtsov in the latest round of Kremlin intrigue sparked the panic. This could explain why figures like MFK-Renaissance Capital chief Boris Jordan were talking up the crisis, telling the press that the Russian financial market is on the verge of collapse. (Kommersant-daily, January 28)
Russia Says Tax Collection Is Improving.