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What’s Causing Russia’s Crisis

August 14, 1998

MOSCOW (AP) _ When it comes to financial markets, perception is reality. And the perception among investors that Russia’s economy is in trouble is generating the very crisis they fear.

For the last several months, investors have been pulling out of Russian stocks and bonds in hordes, and the few who remained seem to be losing their nerve.

The Russian stock market has been volatile in recent days. Sharp drops in share prices forced trading to be suspended twice this week, and a similarly sharp rebound on Friday _ ending up nearly 14 percent _ also caused a 15-minute break.

Moreover, rumors of bank defaults have begun to spread despite Central Bank denials, and the ruble continued to drop.

The stock market remains at about half its previous value, and talk of a ruble devaluation has reached a fever pitch despite repeated denials from the government.

``No, we are not going to devalue the ruble,″ President Boris Yeltsin said on a visit to the northern city of Novgorod.

His assurances are important because ultimately, analysts say, the crisis is mostly psychological _ a crisis of confidence more than cash.

``The main burden right now is managing the psychological atmosphere,″ said Alan Rousso, director the Moscow office of the Carnegie Endowment, a U.S.-based think tank.

As banks and other depositors lose confidence in Russia, they are shifting their assets into dollars and forcing the government to buy back rubles using its foreign currency reserves.

If and when the government decides it cannot keep depleting its reserves to buy rubles, the price of the ruble will fall, or devalue, compared with other currencies. And that would raise prices and spur inflation.

``If the market’s confidence doesn’t return soon, the government will be forced to consider devaluation,″ said Inna Francis, an analyst with Moscow’s United Financial Group.

Many analysts point out that Russia’s underlying economic indicators have not changed since last year, when investor enthusiasm spurred the stock market to new heights, making it the world’s best performer.

Francis provides a stark example of the change in mood: Last July, when the government faced a 40 percent revenue shortfall, the stock market was soaring. This July, when the shortfall was only 10 percent, the stock market sank.

``It’s all a matter of sentiment,″ she says.

So what’s causing this summer’s panic?

Russia faces a number of serious economic travails, and no single problem can be considered the cause of the crisis. But cumulatively, they are enough to make investors nervous, especially in the wake of last year’s Asian crisis.

Among the factors:

_ Oil prices. The crisis was touched off several months ago by a steep drop in world prices for oil, which is Russia’s major export and source of hard currency earnings.

_ Central Bank reserves. The Central Bank has dlrs 17 billion in reserves, bolstered by a recent multibillion dollar IMF loan. Some analysts say that is enough to defend the ruble for weeks or months, but it is not clear whether it is too little in the long term.

_ Federal budget deficit. The Soviet collapse left Russia without a tax collection system, and the government has had trouble putting one in place. As a result, the government has struggled to find the cash to pay salaries, bonds and make loan payments.

_ Short-term debt. The government borrowed heavily following the collapse of the Soviet Union, and many of those debts are now coming due. The government has to pay them in dollars, which further strains its reserves.

_ Long-term economic growth. The Russian economy posted its first post-Soviet growth last year, and before the crisis indications were that the growth would continue. But so far Russia has been unable to build up much of its own industry, making it heavily dependent on consumer imports and vulnerable to price fluctuations for its exports, especially oil.

The government is taking every measure it can think of to raise cash and reassure investors. It can’t do anything about oil prices, but it is tightening tax collection and making its debt payments on time.

But ultimately, investor confidence is as much a matter of feeling as fact.

``The government has done all it can to address the crisis,″ says Rousso. ``Unfortunately, the outcome depends on sentiments over which the government has little control.″

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