When President Boris Yeltsin took to the airwaves May 28 to tell Russians there was no cause for panic, the panic had already been on for several days. As stocks lurched downward and increasingly scarce foreign exchange drained out of the treasury to support the ruble, market prices on short-term government securities fell so low that yields rose to 85% or even higher. No one, it appeared, was willing to hold a Russian government I.O.U. or lend the government money on reasonable terms. Like a desperate gambler turning to loan sharks to cover his losses, the Central Bank pushed interest rates up to 150%. The government, it seemed, was willing to pay any price to keep rubles in the country.

At these rates, interest on government debt will take close to 100% of government revenue. The government has no hope of funding its deficit if it has to pay these rates or anything close to them for long.

Russian government spokesmen laughably insisted that there are no structural reasons for the crisis and pointed out that the basic principles of national economic policy remain unchanged. As it downgraded Russia’s sovereign debt for the second time in three months, Moody’s Investors Services listed a few of the structural problems: “fiscal imbalances, external sector inefficiencies, political instability, lack of policy credibility, and an inhospitable socio-juridical environment for foreign investment.” These problems have not been adequately addressed, said Moody’s, creating an “enhanced risk of default.”

President Yeltsin, who earlier this year commanded the economy to grow two percent, issued some new commands to cut government spending and increase tax revenues. The market was not impressed. The pyromaniac president who has fired five ministers of finance in six years also fired the country’s top tax collector, replacing him with one of the previously fired finance ministers. He then dispatched Anatoly Chubais, whom he has fired twice as Deputy Prime Minister, to Washington in search of foreign loans.

Russian authorities admit that reserves are down to around $14 billion, which suggests the real level is somewhat less than that. The government seems determined not to devalue the ruble, which has slipped only from 6.1 to 6.4 to the dollar during the past two weeks of turmoil. Keeping the ruble in its trading band will require at a minimum a large infusion of hard-currency, both to replenish reserves and to support inevitable statements about a Western “vote of confidence.”

The money will be hard to find. The International Monetary Fund is contemplating release of a $650 million tranche of the $10.2 billion loan negotiated in 1996–but receipt of that money is already in the Russian budget. Moscow is said to be looking for another $10 billion – $15 billion “war chest” or “fighting fund” to support the ruble, but IMF Managing Director Michel Camdessus is skeptical. “I have no reason to believe such a need exists,” he told a press conference in Kazakhstan. After making large commitments to Korea, Thailand, and Indonesia, the Fund in any case is approaching its lending limit.

Two events next week could shape the direction of the crisis from here on out. • Coal miners, striking for back $600 million in back pay, eased their blockade on the Trans-Siberian and other railroads after the government promised to make them whole. They have threatened to renew the blockade if their demands are still unmet on June 5. • President Yeltsin will meet next week with the “tycoons,” the owners and managers of the great financial and industrial groups that dominate Russia’s economy. Conspicuously uninvited is Boris Berezovsky, whom some say is Russia’s richest man. Berezovsky late last year urged a 25% devaluation of the ruble. The president and his advisers may not want to hear him say, “I told you so.”


* Impeachment: The State Duma (lower house of parliament) is expected to open debate June 2 on a Communist motion to impeach President Yeltsin. The constitution makes impeachment virtually impossible but prohibits the president from dismissing the parliament while impeachment is under consideration.

* No sale: The long-planned sale of Rosneft, the country’s ninth-largest oil company and the largest still in government hands, was called off when no bidder met the reserve price of $2.1 billion. A new auction with a reserve price around $1.7 billion should be held June 16-17. At that price at least two bidders, a Gazprom-LUKoil-Shell consortium and an Oneksimbank-British Petroleum group, are likely to compete.

* No merger: The merger between Boris Berezovsky’s Sibneft oil company and Yukos oil, controlled by Mikhail Khodorovsky’s Menatep group, has stalled, like the Rosneft auction a casualty of low oil prices and uncertain economic prospects. Merger talks may resume later in the year.

* First birthday: The NATO-Russia Founding Act was one year old May 27. The Founding Act created a Permanent Joint Council of NATO member states and Russia, to give Russia (in Secretary of State Madeleine Albright’s words) “a voice, not a veto” in NATO affairs. Foreign Minister Yevgeny Primakov, who attended last week’s Council meeting, took the opportunity to denounce NATO as a Cold-War relic that should be transformed from a military alliance to a political organization dealing primarily with peacekeeping operations.