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Must Russia face unrest?
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August 18, 1998: 10:51 a.m. ET
Joyce Chang says ruble devaluation may cause protests, but it's necessary
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NEW YORK (CNNfn) - After the ruble's fall Monday, rating agency Standard & Poor's has downgraded Russia's debt rating to CCC, basically putting it on the same level with Indonesia.
Joyce Chang, managing director of Emerging Markets Research of Merrill Lynch, expects social unrest and protests in Russia, or perhaps more. She joined "Business Day" to talk about the effects of Russia's unstable economy. Here is a partial transcript.
DEBORAH MARCHINI, CNN ANCHOR: What kind of unrest are we talking about? Are we seeing signs that you think could potentially bring down the Russian government?
JOYCE CHANG, EMERGING MARKETS, MERRILL LYNCH: Well, I wouldn't go as far as to say it would bring down the Russian government. I think that tomorrow is a critical day to watch, when you see where the exchange rate really opens, and where interest rates end up. And we've heard reports that in the black market the ruble is trading outside of the managed float that they've already announced. So tomorrow is going to be a critical day as far as looking at the terms of the debt restructuring, where the currency ends up and where interest rates are at.
We've heard reports of some lines at the banks, so that you could have more signs of some social tensions, as well as the banks facing more stress than what we've seen to date.
JOHN DEFTERIOS, CNN ANCHOR: It seems like George Soros forced everybody's hand, but in the end of the day, was this devaluation necessary for Russia to tackle?
CHANG: I think over the last few weeks that everybody has seen an accumulated pressure developing in Russia. I think what surprised people was that with the devaluation, the domestic debt restructuring and the capital controls -- many people thought that they might try one thing, and see how that went. And then maybe add something on top of that. But I think that, aside from what George Soros was saying, that there had been pressures that had been accumulating and it was very hard for them to roll over some of the short-term financing, and that had been apparent for any number of weeks.
MARCHINI: It was reported in the New York Times this morning that Russia was seeking a bailout -- some additional financial help from Western nations -- and they were turned down again by the United States
CHANG: Well, I think in the $22.6 billion package that was put together (from the U.S.) was meant to be a one-time package to stabilize the situation. But there aren't endless amounts of resources that could be pledged to Russia at the current point in time. And I think that the whole hope was that Russia would adopt some longer-term fiscal measures and stabilize the situation. But those are things that really happened only over the meeting term.
MARCHINI: Is it the size of the IMF package, or the lack of cooperation from the Russian parliament to date, that's responsible for the loss of confidence that led to this situation?
CHANG: Well, I think it's a combination of both. And it's the fact that they do need capital inflows, and they do need to have some of the short-term debt rolled over. And that they had not been as forthcoming in the last few weeks as they could have been. The government had been assuming that maybe 70 or 80 percent of their obligations held foreignly could be rolled over, and that just was not happening in the past few weeks.
DEFTERIOS: Today it's just beyond a year when the Thai baht was devalued. Thailand is still in talks with the IMF to expand its budget deficit to jump start the economy. Prime Minister Mahatier of Malaysia is accusing the West again of undermining Asia. We haven't come very far in a year in terms of restructuring these economies, and Japan is a linchpin in terms of getting things started again.
CHANG: Well, not just Japan, but what happens in China as well affects the Asian region. And I think that many people felt that this might be something that initially was like Mexico, where things would go down very sharply, and they would also go through a very rapid rebound. And what we're seeing now is that there really is a multi-year process in Asia. And there's still continuing stresses from the weakening of the Japanese yen.
MARCHINI: Do you see further devaluations, specifically of the Chinese yuan, and the Hong Kong dollar?
CHANG: I think that this year our working scenario at Merrill Lynch is that we do not see a devaluation in 1998. But I think the pressures are going to continue. I mean, the second half of the year, the numbers coming out looked much weaker. It looks like floods and droughts in China could cost as much as 2 percent on GDP off of growth. It looks like the banking system there is having difficulties. And it seems to me that even if they don't devalue, the questions are not going to go away in the market's perspective as far as whether or not they need to devalue.
DEFTERIOS: And the other thing to put into perspective is Hong Kong buying stocks to hold up a stock market. Was that a dangerous precedent by the government, in your view?
CHANG: I think that they wanted to show that they would do some type of strategic intervention where they weren't just going to let the markets take it down as far as it could go. And those kinds of interventions have been tried by any number of countries, as temporary measures to sort of provide some level of support. And I think that it wouldn't surprise us that in any number of countries you see that this being tested again. 
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