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
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 <