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08/03/1998 10:24:16 FEATURE - Russia plagued by market crisis and debt

By Peter Henderson

MOSCOW (Reuters) - Blackouts plague Russia's far east but

lights burn bright and late at the Finance Ministry in Moscow

as Russia battles two crises, one in the markets and one in the

real economy.

The government is fighting for its fiscal life to repay

crushing debts that could sink the stagnant economy, but it

also must enact reforms meant to spur companies to action,

first by paying taxes and secondly by paying each other.

Russia feeds itself from its dachas -- country houses where

workers unpaid for months spend their weekends growing potatoes

to tide them by until companies pay their dues and the economy

gets back on its feet after half a decade of crisis.

There is a lot to pay. Factories and firms owed overdue

arrears of a startling 1.07 trillion roubles ($173 billion) in

June, four percent more than in May, including 70 billion

roubles ($11 billion) in overdue wages.

Most Russian companies limp by, selling a tenth or a fifth

of their wares for cash, bartering for supplies and building up

arrears to employees and other firms with nowhere else to go.

Meanwhile, in Moscow's shiny new office towers, young turks

make grim jokes about the markets, watching stock major indices

which have lost almost two-thirds of their value this year.

"I didn't guess this would happen," said one shocked young

economist at a Western firm in Moscow. He and his colleagues

have an office sweepstake on when the rouble will slip out of

control. "The most popular dates are not far away," he said.

ROUBLE, BOND MARKETS KEY INDICATORS

A stable rouble and low inflation are the clearest and

widest indicators of confidence in the government. The rouble's

post-reform strength is the result of the central bank's

refusal to print money or give baseless credits to industry.

During 10 months of crisis there has been no run on the

banks, indicating some popular belief in the government, though

Russians have tucked away at least $20 billion in hard

currency, the largest hoard of U.S. dollars outside the United

States.

The crisis is in the markets where nervous foreigners

threaten to take home funds they have invested in Russian

rouble debt, up to a third of the $65 billion market, which

would leave Russia scrambling for funds and the rouble weak as

dollars fled.

However, the key is not the size of Russia's total debt,

less than 50 percent of gross domestic product, but when it is

due.

"If you look at the numbers in Russia, they're not

frightening," said Mohamed El-Erian, head of European emerging

market research at Salomon Smith Barney investment bank. "The

big question is how do you deal with the maturity of the debt."

Russia has issued mostly short-term t-bills, which has

proved a nightmare since chill Asian winds swept into the

country, upsetting investor confidence and sparking a

home-grown crisis.

About two-thirds of Russia's rouble debt is due within a

year and the government, which already spends every third

rouble on debt payments, would double the debt in no time if it

rolled over 40 billion at current rates of over 70 percent.

If it could not repay or manage the debt, it might have to

freeze it, or simply start up the rouble printing presses.

A WINDOW OF OPPORTUNITY

The government has bought itself time to impress investors

and improve its own finances by rescheduling about 4.4 billion

short-term debt.

That leaves about $12 billion falling due within three

months, the window in which the anti-crisis programme of Prime

Minister Sergei Kiriyenko must start to bite.

"November is the first month when we should get full

returns from all of the newly introduced taxes and balance the

budget," he said after getting an International Monetary Fund

promise of $11.2 billion in new aid this year.

An IMF-agreed plan calls for second half federal revenues

to rise by 25 percent against the first half to 161 billion

roubles.

Taxes have already been raised, spending cut, and now

Russia and investors are waiting for the government to get

tough.

"Weaknesses in implementation have been the Achilles heel

of Russia's economic policies in the past," said Stanley

Fischer, the IMF's deputy managing director.

The tough new head of the State Tax Service, former banker

Boris Fyodorov, has said Russia should gather most of its taxes

from personal income tax. More than half the population don't

pay taxes.

The IMF agreed for now that Russia should create a special

unit for large taxpayers, especially those with major arrears

such as Gazprom <GAZPq.L>, the largest natural gas company in

the world and Russia's largest taxpayer.

Gazprom owes the federal government about $2 billion in tax

arrears. It promised to pay $650 million cash a month,

beginning in July, after the government seized Gazprom

property.

If Gazprom fails to pay up, and unofficial sources say it

won't, the government has threatened seizure again.

THE HEART OF THE NON-PAYMENTS CRISIS

But Gazprom is not simply a company that refuses to pay

taxes -- it also keeps the country going by supplying natural

gas, without getting paid, to companies and the government.

Such tangled webs keep the lights flickering in the far

east.

The non-payments crisis of the real economy affects the

government, too. It owes Gazprom slightly over $2 billion for

gas it has used, leaving it the net debtor.

"Gazprom has to be careful it doesn't shut the whole

economy down, but it has to make people aware that if they

don't pay for the gas, they ain't going to get the gas," said

one Western oil and gas analyst in Moscow.

The IMF agreement calls for Russia to increase cash

payments for gas to 20 percent of domestic sales by the end of

the year, and cash payment for electricity should rise to 30

percent.

Analysts say Russia needs to winnow the won't-pays from the

can't-pays, which should be left to go bankrupt, and the IMF,

in agreement, has wrung a pledge from Russia to change a

bankruptcy law which favours reorganisation over liquidation.

RUNNING ON DEBT

But until taxpayers believe government threats and find

cash to pay up, the government exists on borrowed money.

Russia should have around $10 billion foreign aid for the

rest this year to help repay debt, but IMF and Russian

officials say that investor confidence, still at a low, is what

is needed.

Unpaid workers don't have much choice but to dig their

potatoes and keep working, but foreign investors can choose to

reinvest proceeds from maturing bills to buy new ones and

investors say they will, at lower rates, if they see results.

"There is a good programme that has been designed," said

El-Erian. "It just has to be implemented, and people need to

slowly regain confidence."

( = 6.2730 roubles)

((Moscow Newsroom, +7095 941-8520

moscow.newsroom@reuters.com))

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