May 28, 1998
PHIL PONCE: Russian financial markets have been tumbling, and yesterday the government began taking major steps to maintain the value of the ruble. We start with a report from Moscow from Mark Webster of Independent Television News.
MARK WEBSTER, ITN: It's been another nail-biting day here on the Russian Stock Exchange, for although share prices have recovered a little, the Russia ruble is still under pressure, and few people believe the president's assurances that there's no crisis. Calling an emergency meeting of the top government officials to say there was nothing to worry about hardly reassured the markets. But Russia's new prime minister, Sergei Kiriyenko, said the country had to live within its means. And Boris Yeltsin promised he'd be tough. "Financial markets in Russia won't collapse," Mr. Yeltsin said. "Our assurances shouldn't frighten investors away from Russia; quite the opposite." But the fear for millions of ordinary Russians, who've gone through the painful transition to a market economy, is that the ruble will be devalued. If it is, imported goods like these, which now fill Russia's markets, will be far too expensive for many customers. And since millions of people, from miners to teachers, haven't been paid their wages for months, there's little sympathy for a government, which has failed to tackle many basic economic ills.
PHIL PONCE: For more, we're joined by Arnold Horelick, Vice President for Russian and Eurasian Affairs at the Carnegie Endowment for International Peace, and Marshall Goldman, Professor of Russian Economics at Wellesley College; he's written extensively on Russia and his most recent book is on Russia economic reform. Gentlemen, welcome to you both. Mr. Horelick, give us a quick snapshot of what's happening in Russia.
ARNOLD HORELICK, Carnegie Endowment: Well, despite what President Yeltsin had to say today, it's hard not to characterize Russia as being in a severe financial crisis, the most severe one it's had to date. The flight of investors from emerging markets sort of has caught up with Russia now. To compound matters further, oil prices have plummeted. Russia is very heavily dependent on oil prices, on oil for its foreign currency earning. The stock market has declined something like 50 percent. As mentioned before, the miners' strike tied up the railroads, damaging the economy even further. To stem the withdrawal of investors from the market, the government has raised interest rates 150 percent. And now the government promises an additional austerity program to cut the already very, very thin budget an additional 10 percent. An indication, it seems to me, of the decline of confidence in the Russian financial markets, was the attempt by the government to auction off Rosnev, the largest remaining public oil company in the country, and they could not get a bid at the original asking price.
PHIL PONCE: And that's because foreign investors just didn't think it was worth the asking price.
ARNOLD HORELICK: Or domestic investors.
PHIL PONCE: Professor Goldman, what is your assessment? How did Russia get to this point?
MARSHALL GOLDMAN, Wellesley College: Well, I think what Arnold said are quite on target. It got to this point because some of the reforms that were introduced originally were mistaken in what they were trying to do. And it caused a backlash. People don't pay their bills; they don't pay their taxes; the government then increases taxes, confiscates any money in the account that a business might have and, therefore, businesses don't want to have any money in their account. But I think the most important thing right now is that whatever their domestic problems are-and there are many-and no matter how rotten the foundation is-and it's quite rotten-the problem is not only Russia's to solve, but now it's really become an international problem. The fact that oil prices are down is really devastating. Three quarters of what Russia earns in its exports really come from oil and minerals export. And without that, if oil prices are down because of the crisis in Asia, it's going to make it very difficult to recoup that money, and if earnings fall from exports, profits will fall, and even those few firms that are willing to pay taxes are going to be unable to do it. So it's kind of a general crisis of confidence. And even though the worst thing to worry about right now is not only are there problems in Russia, but there are sympathetic reactions in some of the East European countries, so it could spread from Russia to Eastern Europe. So it's really quite a serious thing, and Russia got there by making some mistaken decisions and now being caught up in the world's problems.
PHIL PONCE: Mr. Horelick, what are the options-the International Monetary Fund coming in with a major bailout, or something akin to that?
ARNOLD HORELICK: Well, the IMF, the International Monetary Fund, and western governments are trying to create a sense of confidence that the Kiriyenko government, the new Russian government, is up to the task of dealing with the problem. So I expect we will hear in the next couple of days that he IMF has agreed to the $900 million next traunch, the next payment of the 3 or 10 billion dollar loan that the IMF is extending to Russia as a vote of confidence, saying that this is an indication that Russia is on a proper course. In the final analysis, of course, it's a combination of IMF loans and the austerity program--if the Kiriyenko government doesn't work, of course, there will be talk about a bailout-of a substantial bailout.
PHIL PONCE: Well beyond the $10 billion that the IMF has already committed.
ARNOLD HORELICK: Well, the $10 billion are over a three-year period, but well beyond the $9 billion that is coming up soon.
PHIL PONCE: Professor Goldman is there anyway that the western nations are going to let Russia "go under?"
MARSHALL GOLDMAN: Well, they really can't afford to. I mean, we don't want an outpouring of refugees, because of the crisis. And, indeed, one of the ironies of the situation is that the economy looked like it was beginning to turn around. There was-at least it stopped dropping last year, and there was a small amount of growth. And you got a new government in place, which is probably the best they've had in several decades. But, you know, the western countries can't stop this tide from coming in unless they're prepared to spend lots of money, lots of loans. Actually, the IMF loan that's due under discussion right now is only $670 million. And if they couldn't sell that oil company for $2 billion, $2.1 billion, that they were expecting to do, and use that money to prop up the economy, it's going to be hard to see how the rest of the world could come along with what some say may be as much as $10 billion. The IMF is really stretched to do what it's trying to do in Asia. And that would mean that the burden would have to fall on Western Europe and the United States. And while they're all buddy buddies with Boris Yeltsin and Boris Yeltsin, indeed, just went to Birmingham as a member of the big eight, it looks like that big eight is still going to go back to that big seven.
PHIL PONCE: Mr. Horelick, in Indonesia the economic unrest led to the ouster of President Suharto. Is there the potential for that kind of social and political instability in Russia?
ARNOLD HORELICK: Well, so far, the remarkable thing about the Russian populace, which has for the most part suffered from the reform up until today-to date and hasn't had a lot to show for it, has been its resiliency. It could be that there is a last straw that breaks the camel's back. We haven't seen it yet. I think an important new dimension of this financial crisis is that it's the new, still small, but rising middle class that will be most adversely affected by it, and if that's the case, reform could be discredited even in the minds of that part of the Russian population that has been most amenable to it. In the final analysis I think if it comes to the question of a bailout, I think the appeal of responsible western leaders is going to be, do we want to see Jakarta with 10,000 nuclear warheads?
PHIL PONCE: Professor Goldman, how do you react to the point Mr. Horelick made about the seeming patience of the Russian people? How much longer do you think that patience can hold up?
MARSHALL GOLDMAN: I'm always amazed. One of the things I ask when I go to Russia is how do you put up with it, the fact that your wages haven't been paid for three, four, and in the case of the miners six months at a stretch, in a case of-earlier at least-inflation, and the Russians-I would ask-would almost always say, well, we pride ourselves on our ability to suffer. It's almost like who can hold out the longest. But there does come a point when you break. And the fact that there were these miners' strikes, which caused the disruption not only in the minds, the coal mines, but on the railroads, because they sat down on the railroad tracks, does suggest that there is growing unrest that may be able to form some kind of united front. And frightening to President Yeltsin is the fact that General Lebed won the election in Krosnalarsk as in some sense a sign that, okay, we've had enough of the incumbent, we've had enough of the Communists, we've had enough of the far right, we want somebody now who promises a strong leadership and who's going to, indeed, take things under control. And while under the constitution Yeltsin has to serve out his term, it's certainly going to create a level of unrest politically that may be serious.
PHIL PONCE: Professor Goldman, another thing Mr. Horelick said, following up on the issue of political unrest, is the whole specter of Jakarta with 10,000 nuclear weapons. Do you think that's going to drive economic policy?
MARSHALL GOLDMAN: Well, it certainly shouldn't drive economic policy, but it might drive economic policy for those of us looking in from the outside.
PHIL PONCE: That's what I meant.
MARSHALL GOLDMAN: Yes. Certainly, that's why Boris and Bill and Helmut are such good friends. We want to, indeed, do everything we can to support him, but you know, this-there's just the limit to how much you can do. And while we say the right words and, indeed, Yeltsin and Clinton spoke today and to give each other reassurance and being told that Russia is still a safe place to invest and is not going to lead investors to go into that kind of situation when the whole climate is very worrisome. The ruble is falling in value. They're running short of reserves. They're down now to about $14 billion worth of reserves. $4 billion of it is gold. That means there's only about $10 billion that they have left to defend themselves and should remember that in October last year they had as much as 23/24 billion dollars. That's all gone, and the rest of it could go very quickly.
PHIL PONCE: Professor Goldman, thank you very much. More Horelick, thank you for being here.