Is Russia On The Monetary Wagon?

For several years now, watching Russia's efforts at economic reform has been like dealing with an alcoholic relative. Just when it looks as if the worst is over, another binge begins. In Russia's case, the culprit hasn't been booze, but cheap, budget-busting state credits.

This time, however, Russia may be going on the wagon for good. The outline of a serious stabilization program is emerging. The Yeltsin government has started to practice strict monetary discipline while also working to straighten out a messy tax regime, encourage foreign investment, and balance the trade account. While Yeltsin's hospitalization on July 11 for chest pains caused concern, early indications were that it was not life-threatening.

Meantime, early returns from his stabilization program are encouraging: Monthly inflation is down from 17% in January to about 6.5% now, industrial production slipped only 3% in this year's first six months, compared with 24% in the same period a year ago, and the ruble has been appreciating since spring (chart). With their money worth more, Russian consumers are likely to step up their buying of everything from clothing to TVs.

At long last, Russia's economic team seems to be getting its act together. A bold plan was unveiled in early July to peg the ruble's exchange rate for three months and give exporters, investors, and consumers some breathing room. The central bank will intervene to keep the ruble rate from 4,300 to 4,900 to the dollar. "This time, all the stars are coming into line," says Roger Gale, head of the Moscow office for International Finance Corp.

Anchoring the ruble was a rare example of Russian unanimity and quick decision-making. It involved the Economic and Finance Ministers, Central Bank officials, and Deputy Prime Minister Anatoli B. Chubais, who is in charge of economic reform. "When they recommended the ruble peg, Boris Yeltsin signed the order within a day," says Gennady N. Zoteyev, head of foreign trade at the Economics Ministry.

Much of the drop in inflation comes from Central Bank Chief Tatyana Paramonovna's bulldog stance in dealing with powerful farm and industrial lobbies seeking subsidies. Paramonovna was a surprise candidate when Central Bank boss Viktor Geraschenko, known for his money-squandering ways, was cashiered by Yeltsin after the ruble crashed dramatically last October. Yet Paramonovna, one of the few women ever to hold a high position in Russian government, has fastidiously maintained monetary discipline over the past eight months, refusing credits.

She has paid a price for her effectiveness. Mossbacks in the State Duma representing the influential farm and factory lobbies have deliberately not confirmed Paramonovna for the job on two occasions and will vote again on the issue on July 19. She also faces a serious challenge from Russia's newly rich bank lobby, which claims her policies cut into both their profits and their freedom to do business.

HOME REPAIRS. Bankers complain that Paramonovna issues senseless rules and requires that too much of their hard currency reserves be turned over to the Central Bank. Such reserves, for example, were used to build up the Central Bank's $10 billion war chest, to be used in turn to prop up the ruble, if necessary. "We have to sell the Central Bank for its reserves the same amount of money that we made in profits last year," protests Rosa I. Makova, a vice-president for Inkombank, which made a $104 million profit in 1994.

The pegged ruble also will upset the currency speculators who made billions of dollars playing the market last year. "Banks have had an extraordinarily lucrative time dealing with wildly volatile currency markets. If restricted, of course they don't earn as much profits," says Elizabeth Hebert, a fund manager at the Moscow office of Fleming Investments Inc.

So far, though, traders have taken the pegged ruble in stride. The betting is that they will find it less attractive to speculate in dollars. Instead, notes Victor Huaco, president of AIOC Capital, there has been upward pressure on the ruble thanks to heightened interest in Russian T-bills. The government paper does well in stable times and now offers healthy yields of 100% to 120% annually.

Continued economic stability is certain to draw in more foreign investment. It has already grown from a trickle of about $6 million in January to about $200 million in May. Fleming Investments bagged $20 million in fresh foreign money the week the pegged ruble was announced.

The stabilization could suffer a major blow if old-style Soviet lobbies and Russia's nouveau riche bankers manage to get rid of Paramonovna. If that happens, inflation is sure to balloon again, and the ruble will gyrate just as before. Moreover, with legislative elections coming up in December, the Yeltsin government may try to boost itself with such populist but inflationary moves as increasing payments for pensioners. But for now, sober heads have the Russian economy on the road to recovery.

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