The bond market stabilized and interest rates eased by week’s end, but there is no disguising that Russia is in a full-blown financial crisis. Recovery is possible but not assured, and new shocks are likely in the weeks ahead.

For the economy as a whole, stagnation is now probably a best-case scenario. In the worst case, the exhaustion of reserves could force a devaluation, a forced rescheduling of foreign debts, and further austerity for a government that already cannot pay its employees or its suppliers.

The Russian stock market has lost 35% of its value, from a total market capitalization of $126 billion to $82 billion, since the beginning of the year. Half that loss came in seven straight trading days in May. Bond prices took a similar beating. In the period May 5-May 21, the yields on short-term Treasury bills shot up from 33% to 48% before easing to 43% on Thursday. Defending the ruble, the Central Bank raised its rediscount rate to 50%, high enough (given 8% inflation) to keep nervous money at home. But the Bank took that action only after foreign-exchange reserves had fallen to $16 billion, equivalent to only about two and a half months of imports.

The high interest rates pretty much guarantee that Russia’s economy will not grow in 1998. High rates raise the government’s financing costs and complicate the rollover of the $40 billion in short-term federal-government debt that falls due this year. The prospect of a significant cut in the federal deficit, which the International Monetary Fund reckoned at about $30 billion (or 6.5% of GDP) in 1997, is now quite dim. And businesses will find expansion difficult if not impossible. At rates like these, the capital for investment is simply too expensive for any company that has to borrow on the domestic market.