• ACI Russia

08/13/1998 13:47:51 FOCUS-Russian markets dive, authorities stand firm

By Alastair Macdonald

MOSCOW, Aug 13 (Reuters) - Russia's stock market plunged on

Thursday as the central bank stepped in to protect the rouble

and the banking system amid calls for a devaluation.

The sums changing hands in Moscow's nascent markets were

tiny by global standards but the diminishing faith it

demonstrated in the Kremlin's reform programme has implications

for Western economies and for policymakers worldwide.

"This is Black Thursday for the Russian financial markets,"

ORT state-owned television said. Shares lost eight percent after

initial drops of 15 percent, although trade was minimal.

Prime Minister Sergei Kiriyenko, installed by President

Boris Yeltsin in March to place a firmer grip on reforms, was

forced to rail against the trend for the second day running.

"Unfortunately what's happening on the markets belongs in

the realm of psychology," he told reporters after meeting

Communist opposition leader Gennady Zyuganov.

"There are at present no financial grounds for a

deterioration in the situation," he said, pledging to respond to

investor fears by sticking precisely to his austerity programme.

Concerns that Russia's post-communist economy could implode

as confidence evaporates dragged down already nervous stock

markets in Europe and elsewhere and was likely to provoke new

calls for wealthy nations to stand by the Kremlin reformers.

Germany, Russia's biggest creditor, said the Group of Seven

industrial powers was maintaining normal contacts about Russia.

The Finance Ministry in Bonn said restoring confidence depended

on Kiriyenko keeping his word to raise revenues and cut costs.

The leading RTS1-Interfax share index <.IRTS> fell 7.85

percent by 1300 GMT to 100.344, its lowest in two years.

"People are in a bit of shock," Rye, Man & Gor equities

salesman Anders Matson said. "They just want to bail out."

Yields on short-dated treasury bills soared as high as 210

percent from a 28 to 55 percent range and the rouble edged down,

though again price swings were exaggerated by a lack of volume.

Kiriyenko won a breathing space when the International

Monetary Fund led a $22.6 billion bail-out in July. He said his

government could now meet its obligations this month and next.

The United States and other Western governments backed the

IMF deal for fear that a failure by Moscow to repay outstanding

loans would destabilise the world's second-ranked nuclear power.

Since then Kiriyenko has been racing against time to raise

tax revenues despite opposition from the Communist-dominated

parliament. Some investors now fear he is losing the battle,

although Zyuganov said the State Duma (lower house) might break

its recess next week to consider urgent new tax legislation.

The central bank on Thursday restricted some commercial

banks' access to hard currency to help steady the rouble and

extended new credit facilities to some banks to try to prevent

any payment default that could undermine the banking system.

It also hit back at a suggestion in Thursday's Financial

Times by international financier George Soros that Russia should

switch from a slowly depreciating peg of the rouble against the

dollar to a fixed rouble at a rate 15 to 25 percent lower.

"A one-off devaluation of 15 to 25 percent would not solve a

single one of the problems facing the Russian government,"

central bank deputy chairman Denis Kiselyov told Reuters.

The rouble, not fully convertible abroad, was at 6.3450/3750

per dollar at 1300 GMT, down from 6.2960. Controls limit daily

movements but it has fallen from 5.90 per dollar since October

when Asia's financial crisis began to hit confidence in Russia.

The central bank said foreign exchange and gold reserves

fell by $1.4 billion to $17.0 billion last week, which dealers

said had been spent on buying roubles to prop up the currency.

Relative rouble stability and inflation of just over four

percent a year compared to the four-digit digit inflation that

followed the collapse of communism in 1991 are among Russia's

few clear economic achievements of the past seven years.

Kiriyenko would be loath to relinquish that one yardstick of

success by devaluing. He says he will not do so.

But commentators are not impressed.

"Investors have completely lost confidence in the

government," the business newspaper Kommersant-Daily said.

Russia's cash shortage has already deprived millions of

workers of wages and driven some to stage protests. The

Communist opposition, while proved largely toothless in recent

years, is planning to back new nationwide protests this autumn.

One bright spot for Russia was the smooth launch of three

cosmonauts for the Mir space station. Even then, officials noted

that the country's financial problems mean the 12-year-old

complex is doomed to crash back to earth sometime next year.

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