Economic Meltdown

By Bruce W. Nelan

The thunder out of Asia rolled into Russia last week, shaking the already wobbly economy and its twitchy investors. A spate of panic selling sent the stock market plunging and plunging, and it ended the week worth half as much as it was a year ago. Even before the bubble popped in Thailand, South Korea and Indonesia, Boris Yeltsin's government was living dangerously. It was juggling $150 billion in foreign debt, running huge budget deficits and resorting to a kind of pyramid scheme in which it was selling new treasury bills to pay interest on those it had sold earlier.

Now foreign investors, burned by losses in Asia, are taking their money and heading for the exits. Trying desperately to hold on to them and avoid devaluing the ruble, the central bank last week upped its interest rate to 150%. Some experts are talking about a meltdown, but it's more like a drought. Russia's cash flow has dried up.

This is not a new problem, and it is mostly Moscow's fault. Yeltsin and his several governments have never learned how to collect the billions in taxes that corporations and individuals dodge. Other billions are not collected because of sweetheart deals Yeltsin made with Russian oligarchs when he needed their political support.

Nor has Russia figured out how to manufacture things anyone wants to buy, so its foreign-currency earnings come mostly from sales of oil and gas. Falling oil prices mean more cash shortages and still another unexpected problem. Last week the Russian government hoped to sell off a major oil corporation, Rosneft, and earn $2.1 billion, but there were no bidders.

The central bank's reserves have dwindled to about $14 billion, and the Kremlin's great fear is that it will have to devalue the ruble. That would cruelly increase prices for ordinary Russian citizens, cause social and political upheaval and dash Yeltsin's hopes for his legacy as a reformer. At the Kremlin on Friday, he vowed there would be no devaluation and issued a fusillade of decrees on how to get tough with tax dodgers. He fired the chief tax collector and replaced him with Boris Fyodorov, a former Finance Minister and a true reformer. Yeltsin also announced plans to cut spending 12%.

The International Monetary Fund concluded, or pretended to conclude, that Yeltsin's deficit-fighting plans sounded good enough for it to hand over a delayed installment of $670 million, part of a $10 billion loan package. While the IMF denies it is planning a big, new rescue effort, many financial analysts say that is what it will take to restore confidence. With that in mind, Anatoli Chubais, a former Deputy Prime Minister, arrived in Washington Friday on an emergency mission to talk with the U.S. Treasury, the IMF and the World Bank.

--By Bruce W. Nelan. Reported by Andrew Meier/Moscow

With reporting by ANDREW MEIER/MOSCOW