Russia Warns IMF of Further Defaults
Gee, why is no one surprised?
Russia's leading negotiator with the International Monetary Fund warned Thursday that the country could default on its international debt if the fund doesn't extend financial help in the coming months.
"I don't want to scare people with the possibility of default on foreign debt," said Deputy Prime Minister Alexander Shokhin. "But we do need to count on the loyal attitude of our partners in international financial organizations ... in not canceling the earlier, agreed-upon aid packages."
He said that the IMF wants Russia to wait until the end of the year before the international organization decides on whether to extend more of its $22.6 billion aid program to the country. Such a decision, he said, "is driving Russia into a corner."
As the cash-strapped government faces the combined pressures of irate international creditors and an increasingly restive country, the gravity of the economic crisis on its hands grew more conspicuous.
Inflation Takes Off
On Thursday, the State Statistics Committee reported that the plunging ruble caused Russian consumer prices to rocket 45.4% during the first three weeks of September. The Russian ruble has lost around 60% of its value since Aug. 17, when the Russian government allowed the currency to float and defaulted on its Treasury debt.
Before the economic crisis hit in August, the country's inflation was running at less than 1% a month and was expected to be under 10% for the entire year. But when the ruble began to tumble, prices immediately soared. The weaker currency means that Russia's many imports are now two or three times more expensive than before, and that has driven up inflation.
The central bank Thursday warned that if the ruble weakens to a rate of 20 to the dollar, consumer prices could rise between 240% and 290% for the year, according to Russian news agencies. The ruble is currently wobbling around a rate of 16 to the dollar as the government tests a number of possible recovery routes.
Amid dwindling reserves, the central bank said budgetary demands will require the bank to print a minimum of 40 billion rubles to 50 billion rubles in new money, the news reports said, citing data prepared by the bank for Thursday's government cabinet meeting.
The central bank said Thursday it expects gross domestic product in 1998 to total between 2.98 trillion rubles and 3.13 trillion rubles, a decline of between 5% and 6% from 1997. Industrial production is expected to decline by 4.5% to 5.6% in 1998, compared with the previous year, the bank's report said.
Mr. Shokhin said that if the IMF insists on withholding payments until the end of the year, it "could make it impossible in the future [for Russia] to stick to the current pattern of our relations."
He also said it may be time for the fund to change its requirements for countries such as Russia anyway, since its various bailout plans had already been discredited by failures elsewhere in the world.
"The International Monetary Fund is also in crisis, and not only financial but also ideological," he said. "The failure of the models it enforced upon different regions -- Asia, Latin America, Russia -- shows that standard schemes don't work and something in them needs revision."
Primakov Outlines Program
Speaking at the start of a cabinet meeting, Prime Minister Sergei Primakov began to lay out the elements of a much-awaited economic program.
Mr. Primakov said that the government is planning to pay off billions of rubles in back wages to angry pensioners and government workers, and compensate others who have lost money in the collapse of the ruble.
Mr. Primakov said compensation would be issued to the military services as of September, and to government workers starting in October. Without explaining how he plans to fund the payments, he said all Russian citizens would receive compensation for loss of their purchasing power due to the ruble's depreciation starting in 1999.
Noting the importance of stepping up the country's tax collections, Mr. Primakov also said the government intends to reduce the tax burden on Russian companies, a measure that had been proposed recently by both Acting Finance Minister Mikhail Zadornov and Mr. Shokhin.
The government also intends to strengthen control over exports and imports, including an increase in the percentage of foreign currency revenues that exporters are required to sell, Mr. Primakov said.
Other measures planned by the government include the creation of a monopoly on the production and wholesale distribution of alcohol.
Meanwhile, the Russian government is meeting with holders of Russian Treasury debt, according to the government-affiliated Interfax news agency. Final terms for restructuring the securities, known as GKOs and OFZs, may be postponed until Sept. 26. as Western creditors seek additional bargaining time.
A number of proposals for the new restructuring are circulating.
The Russian Finance Ministry said Thursday that local commercial banks may be able to use the defaulted government bonds that they hold to settle maturing ruble forward contracts with foreign investors, according to an Interfax report. Foreign investors will then be able to use the Treasury bills in the debt swap once the conditions are finalized, the ministry said.
Under the Finance Ministry's proposal, local banks will be able to use Treasury bills with maturities through Dec. 31 to pay off their ruble forward contracts.
After the government defaulted on its debt Aug. 17 it also set a 90-day payment moratorium on settlement of foreign debt payments. Settlement of the ruble forward contracts has also been affected by the moratorium. Most of these contracts are maturing through mid-October and have already put a lot of pressure on thinly capitalized Russian banks, increasing concerns over their stability.
As Russia's central bank reserves continued to report a fall in its reserves this week, the data increased speculation that the government had tried to defend the country's banks from being excessively punished by their ruble forward obligations.
By last Friday, reserves fell to $12 billion from $12.3 billion one week earlier, Interfax reported. While the central bank didn't give a reason for the fall it was widely reported to be intervening to support the ruble before the expiration of forward contracts that Russian banks extended as hedge against a ruble decline against the dollar.
Central bank reserves have been dropping steadily in recent months, and last month the bank announced it would try to conserve reserves by limiting its defense of the ruble.
Debt Options Circulate
With debt talks between Russian and Western banks increasingly strained, the Russian government has come up with three options for the renegotiation of $40 billion in short-term debt, according to people familiar with the situation.
Lawyers advising the Western banks said the government could present these options as early as Thursday.
Western banks have refused to participate in the debt swap, under which they would be forced to trade in short-term ruble debt, or GKOs, for longer-term bonds at unfavorable rates. Moreover, they claim the terms give preferential treatment to domestic holders.
The deadlock has continued this week, with a group of 17 banks urging the Russian government Wednesday to extend the Friday deadline for the swap -- itself a one-week extension of an earlier deadline.
But the current set of proposals could be revamped again, as competing competing branches of the Russian government are working on different proposals for the revised debt swap, and the government has only just named a finance minister.
One proposal involves offering GKO holders long-term dollar denominated bonds, instead of the short-term ruble denominated bonds offered under the previous terms.
The second, promoted by Mr. Zadornov, involves paying off this year debt maturing between Aug. 19 and Sept. 16. The rest of the debt under the swap would be allowed to trade freely in the market to allow the market to reprice it. However, the government has yet to confirm this proposal.
Finally, the third option involves swapping shares in state-owned companies, such as oil and gas companies, for the debt.
The Wall Street Journal, September 25, 1998 |
