FOCUS-Russia markets slump, bank stands by rouble
By Irina Demchenko
MOSCOW, Aug 13 (Reuters) - Russia's stock market plunged in early dealings on Thursday as the central bank rejected a call by financier George Soros to devalue the rouble and insisted its present policies would help avert a banking crisis.
''This is Black Thursday for the Russian financial markets,'' ORT state-owned television said in its midday bulletin after the authorities had suspended share trading for 35 minutes when stock prices fell by some 15 percent in early dealings.
The Reuters composite index (.RRC1) was down 14.88 percent at 0830 GMT at 62.44 in thin trade. Yields on short-dated treasury bills soared to 135-167 percent as dealers dumped paper to acquire roubles. The rouble itself edged lower.
''A one-off devaluation of 15-25 percent would not solve a single one of the problems facing the Russian government,'' central bank deputy chairman Denis Kiselyov told Reuters after Soros suggested the idea in Thursday's Financial Times.
The bank also stepped in swiftly to restrict some commercial banks' access to hard currency and to extend credit to a wider circle of private banks after saying some Russian banks had problems making payments after selling roubles aggressively.
''Everything now depends on what the government and central bank do,'' ORT television said.
''Back in the USSR,'' headlined the business newspaper Kommersant Daily in English, warning of a further collapse in confidence and a weak rouble driving up import prices.
''Investors have completely lost confidence in the government,'' it said. ''We cannot rule out that imports could disappear and there will be limits on rouble convertibility.''
Russia's cash shortage has already deprived millions of workers of wages and driven some to stage protests and forced the government to take out foreign loans to avoid bankruptcy.
The prospect that the crisis of confidence could now ravage the banking system is one that alarms governments abroad, which are anxious not to see growing political instability in Russia.
The Hungarian-born Soros, who made a fortune speculating against sterling and other pegged European currencies in 1992, has invested in Russia and is an influential voice in financial markets thanks to the billions of dollars of funds he controls.
But the central bank, which stepped in on Thursday to stave off a payments crunch among Russian commercial banks, said that the rouble's present corridor, based around a pivot of 6.2 per dollar, would help avert a short-term banking crisis.
Kiselyov said Soros's idea would create opportunities for ''speculative games.''
The rouble, which is not fully convertible abroad, was at 6.3250 per dollar at 0800 GMT, down from 6.2960 a day earlier. Restrictions on trade limit daily movements but the rouble has fallen from 5.9 per dollar when the financial market crisis in Asia began to knock confidence in Russia last October.
Relative currency stability and corresponding inflation of just over four percent a year compared to the four-digit digit inflation that following the collapse of communism in 1991 are the clearest economic achievements of President Boris Yeltsin.
Widespread disillusion with the slump in living standards over the past seven years means the government of Prime Minister Sergei Kiriyenko, which is battling to balance its own books, is loth to relinquish that one yardstick of success by devaluing.
Many economists have argued that Russia, which has no worrisome current account deficit, has no reason to devalue.
Kiriyenko ruled it out once again on Wednesday.
Soros said Russia should peg the rouble more firmly to the dollar or euro but at a lower rate than today to reflect the slump in the price of its main export, oil.
Kiriyenko, a youthful reformer appointed by Yeltsin in March, won $22.6 billion in credits from the International Monetary Fund and other lenders last month. Had he not, the government might have been unable to repay existing debts.
With yields on one-month government borrowing leaping to 135 to 167 percent from Wednesday's 28-55 percent range, the state's ability to keep honouring its debts is again being questioned.
U.S. President Bill Clinton, who will visit Russia for a summit with Yeltsin on September 1-3, has been particularly vocal in supporting the new Kremlin team's efforts.
But Washington is concerned at a crisis of confidence, which has already troubled Western financial markets.
Clinton discussed Russia's problems with aides on Wednesday and the U.S. Treasury's undersecretary for international affairs, David Lipton, arrived in Moscow on Wednesday.
Another central deputy chairman, Sergei Aleksashenko, conceded on Wednesday evening that the interbank credit market was suffering a lack of ready cash that was draining confidence.
But he said: ''We intend to take under strict control, every minute and every hour, activities of the banks whose positions are causing serious suspicions of instability. We intend to prevent the interbank crisis from spreading further.''
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