• ACI Russia

08/28/1998 12:40:54 West leaves Russia to put house in order

By Robert Mahoney

BONN, Aug 28 (Reuters) - Western leaders could only fold

their arms and offer advice on Friday as Russia sank deeper into

an economic quagmire.

German and French ministers came up with ideas but no cash

to help President Boris Yeltsin out of a crisis that has shaken

financial and equity markets, particularly in Europe.

Germany, Russia's biggest foreign creditor and investor,

urged Yeltsin to form a government quickly and to take urgent

steps to restore investor confidence, which has been severely

rattled by Moscow's debt moratorium and the rouble's collapse.

One German official said that it did not matter if acting

Prime Minister Viktor Chernomyrdin brought in the opposition

communists as long as some form of government emerged to halt

the decline.

Western leaders and officials insisted Russia stand by the

reforms that have dismantled the former communist economy but

brought yet little benefit to most ordinary Russians.

German Finance Minister Theo Waigel warned Moscow not to run

the rouble printing presses to buy its way out of economic

trouble. "There is no way around the rapid implementation of

structural reforms," Waigel said.

French Finance Minister Dominique Strauss-Kahn said he and

finance ministers from Britain, Germany and Italy, the European

members of the Group of Seven industrialised countries, had

written to Chernomyrdin urging him to act rapidly.

Waigel said Germany was playing an active role in

coordinating the international response to the crisis but he did

not elaborate.

"The priority is the quick formation and confirmation by the

Duma (lower house) of a competent and strong government," Waigel


A new government must have "a clear commitment to continuing

economic reforms and cooperating with international financial

institutions", he added.

Chernomyrdin, who is trying to put together a government,

said on Friday he had the political backing of key potential

rivals like Moscow mayor Yuri Luzhkov and Yegor Stroyev, the

speaker of the upper house of parliament.

Yeltsin appointed Chernomyrdin last weekend, just five

months after sacking him.

U.S. officials prepared on Friday for a meeting between

Yeltsin and President Bill Clinton in Russia next week but no

details emerged of a coordinated G7 response to the crisis.

Deputy U.S. Treasury Secretary Lawrence Summers said there

was no single approach to the problems facing emerging markets.

"While there are important common global elements, each

country's situation has to be evaluated and responded to in

terms of its own particulars," he told reporters in Washington.

The United States and other countries had hoped that a $22.6

billion rescue package put together last month by the

International Monetary Fund would restore international market

confidence in Russia. But Moscow spent most of the first tranche

of the package on a failed defence of the rouble.

Despite the bailout, Russia effectively devalued the rouble

and declared a 90-day moratorium on repayment of some foreign

credits last week. The Russian government said it is likely to

announce details of a short-term rouble debt restructuring plan

on Friday.

Waigel said "an important precondition" for the granting of

a further tranche of help would be steps by Moscow to increase

budget revenues.

But he cautioned against printing money.

"Turning up the printing presses is never a wise solution.

Inflation is no way to escape the financial crisis."

Both the French and German finance ministers played down the

immediate risks of the crisis to their economies, a view echoed

by the Brussels-based European Commission.

"We should not over-exaggerate the stock market

reaction...the economic analysis of the Commission's services at

the moment is still that the economic consequences for the EU

are minimal," spokeswoman Martine Reicherts told reporters.

But the German Insitute for Economic Research (DIW) warned

that the crisis would spread to East Europe and called for

western European interest rate cuts to ease the pressure.

"In my view Europe must clearly lower interest rates in

order to prevent us from falling into a deflationary spiral,"

DIW chief economist Heiner Flassbeck told Reuters.

Flassbeck said the rouble crisis hitting Russia could spread

"like wildfire" to its neighbours, forcing other former Soviet

states to devalue their currencies.

"There will certainly be further devaluations. I cannot

imagine that Kazachstan and Ukraine will be able to maintain

their currencies," he said.

While the German government has insisted that the Russian

crisis would have only a small impact on the German economy,

Flassbeck warned that Eastern Europe as a whole accounted for

over 10 percent of German exports.

"If Eastern Europe collapses that will have an enormous

impact on Germany," he said.

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