• ACI Russia

08/31/1998 16:51:06 ANALYSIS-Russia needs more than a currency board

By Peter Henderson

MOSCOW, Aug 31 (Reuters) - Russia is practically bankrupt

and its future depends on whether it realises it cannot buy

itself out of trouble by printing money, analysts said on


A currency board, which would require all roubles to be

covered by foreign reserves, could be the answer to Russia's

currency instability, economists including International

Monetary Fund Managing Director Michel Camdessus have said.

Russia had $13.4 billion reserves on August 21, against

around 190 billion roubles on the central bank's books that

would have to be covered by a currency board, or about 14

roubles per dollar.

Economists say many other measures must be taken before a

currency board could work.

Snowballing crisis has created a laundry list of things to

pay, and the answer mentioned by a number of leading politicians

-- new credits -- would make a mockery of payments by further

eroding rouble value.

"It is a very simple thing at the moment," said Peter Boone,

co-head of research at Moscow brokerage Brunswick Warburg.

"If you issue credits from the central bank then people will

use those to buy dollars, then the rouble will go and you will

have big inflation. If you stop issuing credits, it will

stabilise the rouble for now and then you have all the other

problems to solve."

The problems that some would attack with freshly printed

roubles include a broke banking system, wage arrears and a

festering government budget deficit that must be cut.

Issuing some credits, such as a one-off payment towards 10

billion roubles of wage arrears owed by the government, could be

necessary, Boone said.

The government would have to stabilise the banking system by

measures such as bankrupting the insolvent ones, and cut its

budget deficit, which would be painful.

Just where the rouble would stabilise is difficult to say,

since the central bank has banned rouble foreign exchange trade

on most markets and leading parliamentarians have different

understandings of what medicine Russia needs.

The central bank official rate for Tuesday was 9.3301

roubles to the dollar compared with 7.905 roubles through

Monday. The rouble traded freely near six to the dollar only

weeks ago.

"We have to stabilise this exchange rate through some

perhaps technical instruments but you know there is a

possibility of interpretation of these measures," said Alexander

Shokhin, head of acting prime minister Viktor Chernomyrdin's


"If the Communists improvise these measures it would be a

return to the administrative system," he told Reuters


"If market-oriented persons improvise these measures, it

would be a very short period of special stabilisation measures

and after that liberalisation of the market."

Chernomyrdin, one of the more reform-oriented players among

Russia's older generation of leaders, called in confirmation

hearings for saving the rouble, individual savings, the banking

system, pensions, wages, industry and agriculture.

"They have expenditure coming out of their ears," said Al

Breach, an economist at Russian Economic Trends, a think tank

supported by Russia and the European Union.

He broadly estimated the banking system had net liabilities

of $15 billion and that the central bank, after taking into

account IMF credits, owed a net $8 billion.

"If the government tries to bail out the banking system by

issuing credits it will lead to hyperinflation and a complete

collapse of the rouble because there are no funds," he said,

though he said some credits could be necessary.

"There must be some inflation," he said, adding that Russia

was not ready for a currency board yet.

The federal government is forcibly restructuring about $40

billion in short-term debt but Boone said it still needs to cut

expenses by 30 billion roubles over the rest of the year.

That is a lot of pain, and the easy alternative is

inflation, when everyonr gets paid, even if the money does not

buy anything.

Foreign allies including Camdessus and U.S. President Bill

Clinton, due in Moscow for a presidential summit on Tuesday,

have said quite clearly they will not help Russia with more

funds before it acts on its own.

((Moscow Newsroom, +7095 941-8520


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