Wall Street Journal - 09/12/98
Paving the Way for a New Government
Yevgeny Primakov easily won approval as Russia's prime minister Friday, after declaring his simultaneous support for Western-style reforms and government involvement in the battered economy.
The nomination of Mr. Primakov, in a compromise between Communists and President Boris Yeltsin, immediately handed a significant increase in power to the Communists.
After he was nominated, Mr. Primakov said the Communist Party's Yury Maslyukov will become first deputy prime minister in his new government, and while his role hasn't yet been defined, he is expected
to be in charge of economic policy.
Meanwhile, the lower house of parliament earlier returned Viktor Geraschenko as chairman of Russia's central bank. Many economists blame Mr. Geraschenko for fueling inflation in the early 1990s while
chairman of the bank by printing rubles to fund the government's budget deficit and provide cheap loans to agriculture and industry.
And as the Communist faction seemed to rack up political gains following the nomination, the liberal Yabloko faction, which was expected to have a major say in the composition of the new government,
seemed to be backing away.
Yabloko's leader Grigory Yavlinsky made it clear ahead of the vote that the party wouldn't supply any government members given his doubts about the government's ability to tackle the economic crisis.
"We still don't know anything about what the economic actions of the government will be," he said. "We are concerned about the composition and direction of the government."
Mr. Yavlinsky initially proposed Mr. Primakov as prime minister Monday during a debate on the failed candidacy of Viktor Chernomyrdin. Political analysts had expected Yabloko to supply members of the
government and act as a counterweight to the Communist Party.
In response to mounting worries over the composition of the new Primakov government, Russian stocks ended lower in thin volume. The Russian Trading System Index closed at 62.31 points, down 3.5% from
Thursday's close at 64.60 points. Trading volume dropped to $2.2 million from $3.1 million Thursday.
"The market was down because there may be political stability but the economic reforms may move ahead much more slowly," said Dmitry Kryukov, trader at MFK Renaissance said. "These two appointments, Maslyukov and Gerschanko, aren't encouraging and aren't likely to boost investors' confidence," Mr. Kryukov said.
Ends Power Vacuum
The 317-63 vote in Parliament's powerful lower house, the Duma, followed almost three weeks of political paralysis amid the country's worst economic crisis since 1991. Mr. Primakov is now charged with forging a plan for Russia to stabilize its tattered currency and pay its mounting bills.
In a speech to the Duma before the vote, Mr. Primakov offered no specific economic programs and appeared to play both to hard-liners and reformers. He said the reform process remains a top priority but
that other priorities include maintaining the integrity of the Russian state and supporting domestic producers.
He said the government must be involved in and regulate the economy but that his posture doesn't mean a return to Soviet-style controls, which Communists who lead the opposition-run Parliament were thought
to be clamoring for.
"The government must get involved in the administration of the economy and industry if necessary," he said.
In his speech, Mr. Primakov also said the central bank must negotiate with creditors of struggling Russian banks and that loans must be at favorable rates. Those negotiations will be carried out under Mr. Geraschenko.
Mr. Geraschenko on Friday said he takes a conservative approach to increasing the money supply, but also said the government must create more liquidity for cash-starved Russian banks. He also said a
currency board "is a stupid idea for our country." Under a currency board, the government pledges to back its domestic money supply with hard foreign-currency reserves at a fixed rate.
The new central bank head also told the Duma that Russian commercial banks are making progress in talks with foreign counterparties over rescheduling large obligations on currency forward contracts that
mature next week.
On Russia's currency markets Friday, signs of political stability lent support to the ruble. The currency ended stronger against the dollar in slow trading, continuing to recover from the 70% plunge it had undertaken from mid-August through Tuesday. Gains Friday were partly attributed to dollar sell-offs by banks ahead of ruble forward-contracts' maturity. The dollar for next-day delivery ended over-the-counter trading at 11.7-11.9 rubles per dollar, down from 13.3-13.6 rubles per dollar late Thursday. It closed slightly above the central bank's official dollar rate for Monday of 11.4281 rubles per dollar. The official dollar rate was 12.8749 rubles Friday.
Ends Impasse
Mr. Primakov, previously acting minister of foreign affairs, was nominated by Mr. Yeltsin Thursday in a compromise with the Duma after a two-week impasse that left the financially paralyzed nation without a government. While the nomination is seen filling a political vacuum, Mr. Primakov's relative lack of financial experience is seen doing little to help solve the country's staggering economic crisis or its
problematic restructuring of $40 billion in domestic debt, which the government defaulted on last month.
The Duma twice rejected the candidacy of Mr. Chernomyrdin, who asked Thursday that he not be nominated a third time, as allowed by the constitution. Mr. Yeltsin then turned to Mr. Primakov. With the
exception of nationalist Vladimir Zhirinovsky's Liberal Democratic party, all the main factions in the Duma initially welcomed Mr. Primakov's candidacy.
Given Mr. Primakov's lack of financial experience, experts say the people chosen to fill key economic posts will be the best barometer of how the new government intends to deal with the controversial
restructuring of its ruble-denominated debt, and more generally, with the country's overall economic woes.
The restructuring terms for the Treasurys -- known as GKOs and OFZs -- have been widely described by investors as confiscatory, while Mr. Geraschenko said Friday "all is not right" with the move. Foreign
investors estimate they lost 90% of the value of their investments under the restructuring terms, while Russian investors didn't fare much better.
Mr. Geraschenko said any changes to the terms should secure "more liquidity to our commercial banks' and ensure the launch of "new instruments onto the secondary market," which has been shuttered since
the restructuring was announced Aug. 17. News of the debt restructuring last month was accompanied by the announcement of a 34% devaluation of the ruble and a 90-day moratorium on payments of some
debt by Russian banks and corporations.
Another Default
On Friday, Russia defaulted on a portion of its interest payment due in August on debt held by the Paris Club, a group of Western creditor nations, Interfax reported Friday. The news agency quoted Deputy
Finance Minister Mikhail Kasayanov as saying Russia paid $115 million as interest on its rescheduled Soviet debt in August, but that this represented only a fraction of what Russia was supposed to pay.
"The remainder will be paid as soon as the Russian payment system is restored," he said, adding that improved tax and customs duty collections will help solve the payment delay. The delay in paying
interest is believed to be the first by Russia on its sovereign debt interest payments to an official creditor nation since the crisis began, the Financial Times reported Friday.
If the crisis continues, Russia could further default on some $140 billion in sovereign debt by next year, including $15 billion of Eurobonds.
Fanning fears of a widespread default, Vladimir Potanin, head of Russian industrial group Interros, said in an interview published in London's Financial Times that Russian banks will be unable to pay their debts to Western creditors unless the terms are radically eased.
Separately, Interfax reported that more than 20 Russian commercial banks have said they are ready to sign agreements to hand over deposits from private individuals to state-controlled savings bank
Sberbank.
Sberbank President Andrei Kazmin also said the bank is prepared to implement agreements on transferring private deposits that it signed Monday with six major commercial banks. Fearing a collapse of the country's banking system, the central bank Wednesday ordered the six banks to close their branches temporarily and transfer all their personal accounts to Sberbank, which is fully protected by
government guarantees.
Meanwhile, in London, investment bank J.P. Morgan predicted that Russian inflation may climb to an annual rate of 100% by year's end, driven up by the ruble's plunge against hard currencies and massive
spending by panicked consumers buying durable goods with their savings.
Prices rose by 65% year-on-year in the first week of September alone, according to official Russian figures. That followed monthly price rises of 15% in August and 0.2% in July, giving year-on-year inflation
of 21.5% and 5.5% respectively. Inflation rates above 75% are likely by the end of September, according to Morgan analysts.
Any prospect that Russia may get back to a measure of stability will do little to alter the inflation outlook, said Ralph Suppel, economic researcher at J.P. Morgan GmbH in Frankfurt. He said real income growth is stagnant, while savings and investment growth are plummeting, as Russians spend money that they fear will soon be worthless.
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