Cash-Strapped Russia Devalues Ruble,
Says It Will Halt Some Debt Payments
An INTERACTIVE JOURNAL News Roundup
After weeks of financial turmoil, cash-strapped Russia took a path it had
vowed not to take: devaluing the ruble and stopping some debt payments.
The government announced an almost 34% devaluation of its shaky currency,
and while denying it was defaulting on its debt, said it would halt payment on
government treasury bills and impose a 90-day moratorium on payments of
ruble-denominated debt.
The devaluation is expected to rattle markets,
cause hardship for Russian consumers and
jeopardize the achievements of seven years of
reform. It had been widely predicted because the
government faces heavy debt payments in coming
days. But President Boris Yeltsin and the central
bank had repeatedly vowed the currency wouldn't
be devalued, contending no one would benefit.
Prime Minister Sergei Kiriyenko said he and Mr.
Yeltsin agreed to devalue after meeting on Sunday
and Monday. Mr. Kiriyenko blamed the
government's problems, in part, on the Asian
financial crisis and the recent drop in world oil
prices, saying the Russian government had been taken by surprise because
things hadn't improved.
Until recently, the central bank had been using its dwindling reserves to keep
the ruble from falling below 6.3 to the dollar. On Monday, the government and
central bank said it would let the ruble fall as low as 9.5 to the dollar until the
end of the year. Details of the debt-restructuring plan won't be announced until
Wednesday, Mr. Kiriyenko said.
Devaluation might bring some immediate relief to major exporters such as oil
companies, by making exports cheaper to foreign buyers. However, it may
force defaults by some Russian corporate borrowers and may badly dent the
government's credibility with its own citizenry at a time when many Russians
are already enraged over unpaid state wages and disparities in wealth. Mr.
Yeltsin and his government have pointed to a steady currency as one of the
few tangible benefits of years of reform.
Meanwhile, Anatoly Chubais, Mr. Yeltsin's envoy to international financial
institutions, conferred with officials of the International Monetary Fund after the
announcement. He insisted the government was not defaulting on its debt.
"We are not reneging on our debts," he said. "We realize that many of our
partners will feel uncomfortable, but any hesitation on our part would cost them
far more."
An IMF team arrived in Moscow on Sunday in advance of the move. Mr.
Chubais said the team, led by John Odling-Smee, supported the government's
actions. He also said they intend to release another disbursement of a
multibillion-dollar loan next month.
The ruble's devaluation is expected to lead to the collapse of many Russian
commercial banks, which are overdependent on devalued-ruble assets. In
order to limit the damage, 19 of Russia's largest banks have set up a pool that
will take joint responsibility for the banks' liabilities, Mr. Kiriyenko said. In an
attempt to avoid panic selling of the ruble, the Russian authorities also
announced capital controls on Russian market participants, although they didn't
specify what those restrictions would be.
Mr. Kiriyenko declined to call the move a devaluation, since technically the
government only lowered the limit to which it would allow the price of the ruble
to fall and the markets set the actual price.
But with most currency trading suspended or tightly controlled, the situation on
the street -- where banks immediately raised rates above 8 to the dollar and as
high as 9.5 -- made it clear that the ruble's value had fallen to the new level.
The devalued ruble is expected to bring the financial crisis home to the Russian
people, who so far have been spared its worst effects, making even simple
foreign products too expensive for the average Russian, which in turn could
spark social and political turmoil.
Immediate public reaction to the devaluation was muted, with some Russians
approaching exchange booths only to turn back when they saw the massive
increase.
"It was hard to survive before on my pension of 350 rubles a month," said
retiree Yelena Bochet, 68. "But now I simply don't know what to do because
all the prices will certainly soar."
The Russian government postponed official trading of the ruble for several
hours Monday, and trading remained nearly nonexistent. Traders, however,
expect the currency to drop sharply in the wake of the devaluation. On the
futures market, many had expected the currency to drop to around 12 rubles
to 13 rubles to the dollar.
The government also suspended trading on the treasury-bill market until
Wednesday, forcing a restructuring of all existing ruble-denominated treasury
debt -- known mostly as GKOs -- maturing up to Dec. 31, 1999. The
government said that new securities would be issued for all the paper, and that
terms of the new paper would be announced Wednesday. To ensure the
liquidity of the market, the government plans to issue one- and two-week
government bonds Friday, Mr. Kiriyenko said.
The Russian stock market, which last week was pummeled by rumors of a
devaluation, absorbed Monday's news with comparative calm. Russia's main
stock market index, the Russian Trading System, was down 3.73, or 3.2%, at
111.27 at late afternoon. Because the decision to devalue had been so widely
rumored, the market had already factored in the announcement. Last week,
devaluation rumors twice sparked drops of more than 10% that forced the
Russian Trading System to halt activity.
The recent upheaval in Russian markets has come despite a $22.6 billion aid
package led by the IMF designed to replenish government coffers hurt by the
costs of defending the currency and servicing its considerable debt. Russia has
relied heavily on issuing debt to finance the chronic budget deficits that have
helped spark the crisis.
But the IMF lending program has failed to convince investors. The IMF is
sending a special mission to Moscow for talks on the implementation of the
program, Interfax news agency reported. IMF Managing Director Michel
Camdessus said it is essential for Russia to quickly pass legislation aimed at
increasing tax revenue and cutting spending.
Major Russian banks showed the first outward signs of a liquidity crunch
earlier this month when they stopped making short-term loans and trading
currency with one another after some institutions spooked the market by failing
to meet payments. The central bank, which didn't identify the weak institutions,
raised overnight credit limits to help some banks meet short-term obligations. It
also reduced credit lines that some banks use to buy dollars, a move intended
to tighten its control over the worsening exchange rate.
Russia's opposition-dominated parliament will hold an emergency session
Friday to discuss the deteriorating financial situation. Finance Minister Mikhail
Zadornov and central bank Chairman Sergei Dubinin are scheduled to attend.
Mr. Yeltsin has also been invited to speak. But legislators probably won't get
around to discussing long-awaited laws to shore up Russian financial markets
until next Tuesday. |
