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
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
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
However, the key is not the size of Russia's total debt,
less than 50 percent of gross domestic product, but when it is
"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
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
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
Taxes have already been raised, spending cut, and now
Russia and investors are waiting for the government to get
"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
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
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
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
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
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