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Strategies & Market Trends : Investment in Russia and Eastern Europe -- Ignore unavailable to you. Want to Upgrade?

To: djane who wrote (361)	7/20/1998 1:51:00 PM
From: Real Man	Read Replies (2) \| Respond to of 1301

Forbes on the Ruble (there are some charts, you can find them in the original Forbes article).: Will the ruble go the way of Asian currencies? Don't bet on it. As the ruble goes, so goes Russia By Paul Klebnikov IN MARCH Boris Yeltsin fired Russia's tough but unpopular economics czar, Anatoly Chubais. As FORBES predicted (Feb. 23), the firing spooked foreign investors: The Russian equity market has crashed 58% in six months. To keep selling its ruble-denominated T bills (called GKOs), the government had to raise rates as high as an annual 72%, before settling for 65% recently. At least two FORBES columnists have predicted that the Russian ruble would go the way of Asian currencies. But there is a strong case to be made that the ruble will hold near its current value of 6.2 to the U.S. dollar. For one thing, the domestic price of devaluation may be more than the country can afford. The last seven years, as far as the average Russian is concerned, have been a disaster. Russia has lost its great-power status, and the mass of the people are worse off than under socialism (witness the massive rise of poverty and steep drop in life expectancy). The present government's one success has been to bring inflation under control and peg the ruble to the dollar. If this falls apart, all the pain has been in vain. Striking coal miners, who blocked the Trans-Siberian Railroad this spring, are threatening to go on strike again; students have staged mass demonstrations in Moscow and some provincial cities. Even the man-in-the-street cares about the ruble/dollar relationship: Runaway inflation is the last thing he wants now. The motivation to defend the ruble is clearly there. Are the means? Yes. Unlike many other economies, Russia can afford to push interest rates to whatever level is required to defend its currency. Since there is no real internal credit system in Russia today, high interest rates don't have the devastating effects they have elsewhere. Russia's external debt is not high relative to the size of the economy. Russia's total foreign debt (both public and private) is projected to rise to $147 billion by the end of this year, equivalent to 32% of GDP. Compare that to the debt loads of South Korea (59% of GDP), Thailand (70%) or Indonesia (148%). Moreover, two-thirds of the Russian debt is old Soviet debt, where virtually no principal payments are due until 2003. Add it up and Russia's foreign debt service is $11 billion a year, equivalent to 13% of its exports. By comparison, Brazil and Argentina have diverted 20% of their exports to service their debts. Countries with overvalued currencies usually run big current account deficits. Russia has long run a trade surplus ($17 billion last year). Falling oil prices this year will produce its first current account deficit, but it will only be about $5 billion. Why all the pessimism, then? The Russian financial crisis is centered on the ruble-denominated T bills, the GKOs. Of these, foreigners hold an estimated 30%, about $20 billion-not a huge sum. The first panic attack in the GKO market happened with the Asian crisis last October. South Korean and Brazilian banks held nearly 10% of the GKOs; many cashed out to cover losses at home. But the Central Bank hiked rates, Chubais made the rounds of the Western financial capitals and the ruble held firm. There is every reason to think it will hold firm again with interest rates at 65%. Once investors realize that the government can defend the ruble, they will rush to get that 65% and the rates will fall. Having seen what devaluation did to Indonesia, the international community will almost certainly provide whatever help the Russian government needs. Unlike Japan's apparently traumatized government, Boris Yeltsin's new government is making the right noises-planning tax cuts, spending cuts, and curbing Russia's crony capitalists. Yeltsin has even brought back Anatoly Chubais (in an informal capacity) to help sell the $1.2 billion Eurobond several weeks ago. Serious devaluation of the Russian ruble would be a political disaster for Russia and for the world. There is a powerful chance it will be averted. Inflation is down... but rates are up... and equities suffer Source: Credit Suisse First Boston.