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Russia Risks 'Social Explosion,' Former Deputy Prime Minister Nemtsov Says
Russia Risks 'Explosion,' Ex-Minister Nemtsov Says (Update1) (Adds IMF making no comment today in third section, Clinton administration comments in fifth section.)
Moscow, Aug. 29 (Bloomberg) -- Russia risks widespread social unrest if it follows through with plans to freeze prices, forbid companies from owning hard currency, restrict foreign trade and print more money, former Deputy Prime Minister Boris Nemtsov said.
The communist-dominated lower house of parliament, the Duma, is pressing Viktor Chernomyrdin to agree to those policies before it votes on his confirmation as prime minister next week. Duma leaders want the state to take over the largest banks and companies and say the government must print more money to pay back wages. ''The pressure to print money is going to increase day by day,'' Nemtsov, who was fired yesterday President Boris Yeltsin, said in an interview with Bloomberg News. ''If the new government takes stupid steps, it will lead to a social explosion.''
Russian stocks, bonds and the currency plummeted this week after Yeltsin fired the government of former Prime Minister Sergei Kiriyenko, let the ruble devalue and stopped trading and making payments on ruble bonds to lower debt servicing costs. The ruble dropped 12 percent to 7.95 per dollar, according to the official rate of the central bank, which stopped all foreign currency trading in Moscow on Wednesday because of excessive demand for dollars.
Measured by limited over-the-counter trading, the ruble continued to drop, and fell about 40 percent for the week, to 12 rubles per dollar.
The benchmark Russian Trading System stock index fell to an all-time low, and foreign bonds maturing in 3 to 30 years dropped to between 23 cents and 28 cents on the dollar.
Higher Inflation
Once Chernomyrdin's government is confirmed, it's likely it will agree with the central bank to increase the money supply, Nemtsov said. If the amount of new cash is limited, and the process handled carefully, the inflation rate will rise to between 20 percent and 30 percent annually, compared with earlier forecasts of between 5 percent and 8 percent this year.
If the process is handled badly, the inflation rate could shoot up to above 100 percent, he said.
The reality, ''as usual in Russia, likely lies in the middle,'' Nemtsov said.
Nemtsov said Chernomyrdin is being pressured by the communists on one side and by big business on the other, and is struggling to find a compromise between the two.
It's unlikely, he said, that Chernomyrdin, who served as prime minister from December 1992 until March of this year when he was fired by Yeltsin, will retain his independence. ''Chernomyrdin is an experienced politician,'' Nemtsov said. ''He's experienced in living with high inflation and in fighting it.''
In 1995, the inflation rate was as high as 250 percent.
IMF Warning
An International Monetary Fund spokeswoman today declined to comment on Nemtsov's remarks, though she pointed to a statement made yesterday by IMF Managing Director Michel Camdessus warning Russia to resist printing money.
Anatoly Chubais, fired this week as Yeltsin's envoy to international lenders, told Chernomyrdin repeatedly over the past five years ''how stupid it was to print money,'' Nemtsov said.
Still, printing money may be one of the few ideas supported by all sides. Business leaders want new cash to prop up the banks. Communists want the government to print money to pay back wages to workers, many of whom have gone unpaid for as long as a year.
Nemtsov defended the Kiriyenko government's decisions to let the ruble fall and to restructure its Treasury bonds.
The mistake, he said, was that the government didn't start negotiations with bondholders in May on a restructuring plan. The Kiriyenko government's restructuring plan, announced on Tuesday, forces holders of 281 billion rubles ($35 billion at the official rate) of bonds to take losses of 70 percent or more. ''One of the mistakes was that there were not any discussions between investors and government officials,'' Nemtsov said. ''That's why there was such a bad response throughout the world.''
The initial government restructuring plan to replace the ruble-denominated securities with new dollar bonds would have been preferable, he said, but it was opposed by the finance ministry.
Debt for Taxes
The government yesterday was discussing a plan that would allow companies to pay back taxes with Treasury bills and bonds, if they pay current taxes on time with cash. That would decrease the supply of government debt securities in circulation, and clear the arrears of companies, he said. Trading in the securities was stopped Aug. 17. If it resumed, the plan also would increase demand.
An immediate problem facing the Chernomyrdin government will be to rescue the banking system. Russian stocks and bonds, which comprise as much as a quarter of all assets held by Russia's 1,600 banks, have lost more than 80 percent of their value this year.
The banks also hold an estimated $10 billion in ruble-dollar forward contracts, which obligate them to pay out dollars at a given ruble exchange rate in the future, and will be far more costly because of the ruble's decline. Analysts and central bank officials have said that hundreds of banks could fail.
Chernomyrdin, speaking to Russian television reporters between negotiations with the Duma today, said that all commercial bank deposits will be protected by the government. ''Depositors in commercial banks, I want to tell you again, you will receive all your deposits,'' Chernomyrdin said. ''They will not be diminished (and) the ruble will continue to be convertible.''
Clinton Visit
Next week's visit by U.S. President Bill Clinton and his meetings with Yeltsin and Chernomyrdin are important for pushing Russian free-market reforms forward, Nemtsov said. ''I hope the most important discussion will be around the economic crisis in the country,'' he said.
Clinton is in a position to help Russia secure the next installment in September of the country's $22.6 billion in International Monetary Fund-led loans, he said. ''If the Western world will send a message that they are ready to assist Russia but only after Russians prepare a very specific reform program, then I think it will be good,'' Nemtsov said.
White House officials weren't available for comment today. Clinton administration officials cautioned this week that there were no quick fixes to the Russian crisis.
Nemtsov said the government should open Russian markets for foreign banks and insurance companies so that the population will see ''islands of stability'' amid the banking crisis.
That would be ''a short way to overcome the crisis,'' though it's not guaranteed that anyone who supports the idea will be in Chernomyrdin's cabinet, he said. 'Wise' Steps
Finance Minister Mikhail Zadornov and Boris Fyodorov, the State Tax Service chief, might stay in the government and provide for ''wise'' steps to be taken, Nemtsov said.
Nemtsov said Kiriyenko's government was fired because it had prepared ''painful'' measures to restructure big banks and financial-industrial groups, and planned to launch them this week.
Russia's wealthiest industrialists and financiers, the so- called oligarchs, including Boris Berezovsky, the executive secretary of the Commonwealth of Independent States, pressured Yeltsin to fire the government, Nemtsov said. ''Berezovsky is today's Rasputin and Yeltsin looks like Tsar Nicholas the Second,'' he said.
Rasputin was a mystic and the personal physician and advisor to the family of Tsar Nicholas II, the last Tsar of Russia. A peasant who ingratiated himself with the Tsar's family after treating the hemophilia of the Tsar's son, Rasputin distracted the Tsar from the suffering that was going on in the country.
He said Yeltsin is ''generally'' in control of the situation in Russia and only ''generally'' understands the problems facing the country.
Even so, it's important Yeltsin remain in office until his term expires in 2000, Nemtsov said, because an early resignation would create more instability. ''We have a very bad experience in Russia -- if the Tsar or the General Secretary leaves, we have destruction,'' Nemtsov said. |
