Russia: A Quick Road To Ruin

As the economy grinds to a halt, a political standoff stymies hopes of easing the mounting crisis

It was not the most propitious moment for President Bill Clinton to sing hymns to globalism's glory. In Moscow stores, prices of imported coffee and beer had risen 80% in two weeks, while the price of cigarettes had doubled. Cereals and medicines were running short as panicky shoppers took to hoarding. Russia's government was paralyzed as the Duma rejected President Boris N. Yeltsin's nomination of bureaucrat Viktor S. Chernomyrdin as Prime Minister. Amid mounting chaos, Clinton arrived to meet Yeltsin--and exhorted students at a prestigious policy institute: "To get your fair share of investment, you have to play by the rules."

Rules? What rules? Although Yeltsin promised Clinton that Russia would stick to its reform path, the reality looks just the opposite. The economy is grinding to a halt as Communists in the Duma pressure Yeltsin for concessions in exchange for approving Chernomyrdin. Businesses are freezing their activities while they wait to see how low the ruble will fall and whether defunct banks will work again. Yet the political standoff has stymied hopes of easing the crisis. "Without a government, Russia has little to say on the economic front, except perhaps `Help!"' says Thomas Adshead, research chief at Moscow's United Financial Group.

"POLITICAL WHORES." The stage is set for a political showdown in early September. If the Duma fails to approve Chernomyrdin in a second or third vote, Yeltsin says he will use his constitutional right to dissolve the legislature, rule by decree, and call early elections. Some analysts believe Yeltsin might postpone elections beyond the allowed four months. Both sides are playing hardball. And Russians and foreigners alike are disgusted by the politicians' grab for power as the economy worsens. Complains a Western banker: "It's like watching political whores scramble over kopeks on the floor."

If he's approved, Chernomyrdin is promising to deal promptly with the currency crisis, protect peoples' savings, and pay back wages and pensions. He is expected to announce restrictions on currency convertibility and the government takeover of some banks, which may involve a bank holiday and transferring citizens' deposits to the state savings bank, Sberbank. Insiders say he will try to boost Russian banks' liquidity--and ease investors' ire--by giving holders of defaulted Treasury bills better terms than the meager 17 cents on the dollar offered under the recent forced debt swap. And he is calling for tax cuts to spur industry.

All this will take money--something the government doesn't have unless it turns on the ruble printing press. Given the populist turn in Russian politics, there are no strong political groups arguing against inflationary policies. The have-nots are ready for a handout, and Yeltsin knows it. Polls show that up to 75% of voters would favor the Communists if an election were held today.

While the politicians vie for power, the economic picture grows more dire every day. Financial-services companies and retailers are putting workers on extended vacations, slashing staff, or simply shutting their doors. Local investment houses such as Brunswick Warburg, Rinaco Plus, United Financial Group, and MFK Renaissance have shed 20% to 50% of their staffs, while others have slashed salaries. The newspaper Kommersant Daily predicts that 200,000 workers in finance, insurance, and tourism could soon lose their jobs.

The experience is profoundly disillusioning for educated young Russians who started their careers in the once-booming financial industry. Typical is Julia Stepanova, 26, a fund manager at Regent European Securities in Moscow. Until a few months ago, she was fending off calls from headhunters. But on Aug. 28, she watched nearly half her co-workers get fired, and she worries that she will be next. "My friends and I have always been employed and always had a future," she says. "Suddenly, there are no jobs at all." Stepanova, who is fluent in English, says she might teach English if she can't find work in her field. "I am angry at the government," she says. "They had five good years when the market was growing. They didn't do anything--only steal."

The banking gridlock is hurting far more than financial groups. Many foreign companies are not signing new contracts to export to Russia because their customers' accounts are frozen in Russian banks. And Russian importers are reluctant to bring in new supplies when payments, prices, and exchange rates are so uncertain. "Nobody is buying. I called 15 clients, and they are all on hold," says Peter Vins, owner of Vinlund, a Moscow shipping company with clients in the food-importing industry. With no access to his bank account, he can't clear 20 trucks filled with goods through customs--and can't pay his 100 employees. "We will survive," says Vins, "but we'll lose a lot of money."

The results of such bottlenecks are growing shortages. Stores were cleaned out of imported televisions, washing machines, and refrigerators as Russians invested in durable goods before the ruble fell further. Fearful of inflation, shoppers are snapping up everything from macaroni to sugar. "I don't know how I will live," sighs Lyudmila Ivanova, a pensioner shopping for meat in Moscow. Many retailers have closed their doors, unwilling to sell goods until the ruble rate stabilizes. Unilever PLC says orders for its shampoos, margarines, and salad dressings have almost dried up from Russian retailers and wholesalers.

The economic crisis is affecting manufacturers, too, particularly those that have made strides toward competitiveness. Inefficient factories relying on barter deals hardly felt the collapse of the banking system. But well-run companies such as the Izhevsky Radio Factory in central Russia are getting clobbered. In five years, the former defense plant has turned itself into a profitable private enterprise, slashing 60% of its workforce and developing products such as battery chargers to attract cash customers. But now, frets Financial Director Leonid Rogozin, "we can't pay our debts and people can't pay us because the banks aren't making transfers." The factory is behind on wages to its 5,000 employees and may have to lay some off. That would be a bitter pill, especially if the government heeds Communist calls to bail out industries that have balked at restructuring.

UNRELIABLE SOURCES. Well-managed companies such as Izhevsky are also hurt by the plunging ruble. Normally, a weakened currency would give them an edge over foreign competitors. But Russia's agricultural and industrial base remains such a shambles that the best consumer-goods companies buy raw materials abroad because they can't find reliable domestic supplies. Moscow's Cherkizovsky Meat Plant, for example, imports 70% of its ingredients. Retail prices of its sausages are up more than 15%.

That's only the start of its troubles. Foreign suppliers are now demanding cash up front, and Cherkizovsky, which had $2 million frozen in its accounts when SBS Agro bank went belly-up, can't scrape together enough dollars to pay them. Now the company is preparing to scale back output and barter with customers as a hedge against currency fluctuations. "We've just turned back the clock to the pre-banking era," says Financial Director Michael Harmon, an American who has spent two years helping restructure the $400 million-a-year company.

If Yeltsin can install Chernomyrdin, the former Gazprom chairman and presidential candidate will walk a fine line. He'll want populist measures such as indexing wages while asking the IMF for more of a $22.6 billion loan approved before the default. For now, Russia is likely to follow its own rules, not those of the global marketplace--whether President Clinton likes it or not.