RUSSIA FIGHTS OFF THREAT OF FINANCIAL MELTDOWN…

Speaking on Russian television this morning, President Boris Yeltsin said there was no cause to panic over the country’s financial crisis. He insisted that Moscow has enough reserves to support the ruble and that there will be no devaluation of the currency. Yeltsin spoke after an emergency meeting this morning with Prime Minister Sergei Kirienko, Finance Minister Mikhail Zadornov and Central Bank Chairman Sergei Dubinin. (BBC, May 28)

Markets rose slightly this morning in Moscow in response to yesterday’s decision by Russia’s Central Bank to triple its refinancing rate to 150 percent, the highest rate for two years. This is a dangerous move: It will raise the cost of government debt-servicing and further increase the budget deficit. Two days ago, President Yeltsin ordered a 40 billion ruble (US$6.5 billion) cut in federal spending. The move, however, did nothing to check panic-selling of shares and the stock market’s downward trend. The main danger was that panic-selling could force the Central Bank to devalue the ruble and re-ignite inflation. (Russian agencies, May 27)

The Central Bank has fought off two assaults on the ruble in the past eight months. This one is the worst so far, but the government seems determined not to resort to devalue the currency. By sparking a return to high inflation, devaluation could undo all that has been achieved during six years of painful reform. Investment would slump while living costs would soar. Russia could then face not just a financial crisis but a political and social one as well. The coal miners who last weekend lifted their blockade of Russia’s railways warned that, if their wage arrears were not paid by June 5, they would resume their protests. There would then be a real danger of industrial and social unrest that could undermine the government’s ability to rule.

…CONFIDENCE, NOT STRUCTURE, AT THE HEART OF THE PROBLEM.