• ACI Russia

08/26/1998 08:37:07 Russia financial crisis Q&A

NEW YORK, Aug 25 (Reuters) - Following is a basic summary of

the recent financial crisis in Russia. Q. What has caused the

crisis in the Russian economy? A. Russia's government and its

banks are critically short of cash, which has slashed domestic

lending and severely limited the government's and corporations'

ability to pay wages or meet debt payments.

Slumping prices for industrial commodities, notably oil,

which sits near a 10-year low, have hammered the Russian

economy. In 1997, about half of Russia's hard currency revenues

came from oil and gas exports. As oil prices fall, Russia

receives fewer dollars.

In addition, Russia needs to reform its tax system and end

widespread tax evasion, which causes large budget deficits and

cuts confidence that Russia will be able to repay its debt. Q.

What is the government doing in response? A. Russia on Tuesday

restructured $38 billion in short-term domestic government

debt, extending the maturities and lowering the interest rates.

Russia last week decided to let the rouble weaken, allowing it

to spend less of its depleted hard currency reserves trying to

prop up the unit. On Tuesday the rouble fell 10 percent to a

new low of 7.88 to the dollar. Ten days ago it stood at 6.2 to

the dollar.

Russia also recently suspended debt repayments for 90 days,

an effective partial debt default.

President Boris Yeltsin on Sunday sacked his entire cabinet

and rehired former Prime Minister Viktor Chernomyrdin to

oversee reform efforts.

Three major banks announced they would merge and more are

expected to follow.

Russia last month secured a $23 billion internatioanl

bailout assembled by the International Monetary Fund. Q. How

big is Russia's total debt? A. Estimated in July at about $200

billion. Given the decline in the currency, that total today

would be about $250 billion. By comparison, the United States

federal government debt now stands at over $5.0 trillion. New

York City currently owes $27 billion to creditors. The portion

of debt restructured Tuesday amounted to $38 billion due to be

repaid before the end of 1999. Q. Who does Russia owe? A. A

combination of domestic banks and large international mutual

funds and hedge funds willing to risk large losses in hopes of

reaping potentially large returns Russian bonds could offer. Q.

What are the consequences to the global economy if Russia is

unable to repay its debt? A. Developing nations around the

world have seen their currencies and stock markets tumble and

interest rates shoot higher as Russia grapples with its fiscal

crisis. Oil producers like Venezuela and Mexico have been

particularly hard hit.

Should Russia default it would likely cause moderate to

severe damage to many of these same nations. Q. How will that

affect the U.S. economy? A. Not much directly, since Russia's

economy is very small, but a default could hurt Asian economies

and indirectly hurt Japan, Canada and Mexico -- the three

largest U.S. trading partners. One positive effect would be

continued low commodities prices, which are keeping U.S.

inflation near 30-year lows. REUTERS 252051 GMT aug 98 <

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