Publication: Monitor Volume: 4 Issue: 97

When the Russian stock markets opened on Monday, May 18 –stock prices plunged by 10 percent in what brokers described as the most abrupt fall in five years. The price of stock in companies such as LUKoil and United Energy Systems fell to almost half their October 1997 peak. UES shares fell from 27 cents on Friday to a low of 21 cents on Monday, clearly reflecting worries at the Duma’s imposition of a 25 percent limit on shares in the electricity giant which can be held by foreigners (Kommersant-Daily, May 19).

No single piece of bad news seems to have triggered the sell-off. Some attributed it to the renewed crisis in Indonesia, others to rumors that President Yeltsin would run for a third term. Mainly, it seems to have been a straightforward panic, which became a self-fulfilling prophecy as brokers rushed to dump shares.

The crisis spread to the treasury bill market, with interest rates on government debt leaping to a punishing 48 percent per year, the highest levels since October 1996. Late Monday, the Central Bank of Russia gave in and hiked its key refinancing rate from 30 percent to 50 percent. There is a danger that the spreading crisis could cause a run on the ruble. Some $40 billion of short-term government debt falls due this year, of which around $18 billion is held by foreigners, while the Central Bank has only $16 billion in reserves. As long as the bank is willing to hike interest rates to the level necessary to defend the ruble, foreign lenders will probably stay on board. (Moscow Times, Kommersant-Daily May 19)

World Bank president James Wolfensohn arrived in Moscow on Tuesday to discuss the release of the third $700 million installment of a structural adjustment loan. An IMF team had arrived on Monday to review progress prior to releasing the latest $700 million quarterly tranche of their three-year Extended Fund Facility. However, the good news was matched by the bad. On May 18, the State Duma voted to override a presidential veto on a law which states that any foreign loans of more than $10 million must be approved by the Duma. (Previously, they required approval of loans in excess of $10 million.) Government officials were uncertain how this will work in practice: clearly, it will delay new projects for months. (Kommersant-Daily, May 19)