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A ruble rescue with punch
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May 27, 1998: 12:38 p.m. ET
Analysts say Russia's tripling of interest rates has worked in the past
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NEW YORK (CNNfn) - Russia's stock markets took another tailspin Wednesday despite an eleventh-hour scramble by the government to lure back investors by tripling interest rates and issuing public reassurances that things are under control.
Russia's benchmark RTS stock index plunged 12 percent Wednesday as fleeing investors with one eye on Asia and the other on Russia's depressed domestic economy wiped out the market's entire gain from 1997.
Another leading market barometer, the Moscow Times index of Russia's 50 largest companies, lost 11.5 percent of its value, bringing the year-to-date decline to around 50 percent.
"You've got a situation now where you've got blind panic, especially among Russians," said Martin Diggle, a director of the brokerage house Brunswick. "They're selling at any price they can get. It's self-fulfilling, it's irrational."
The risky decision by Russia's Central Bank to raise its Lombard refinancing rate from 50 to 150 percent was a shrewd gamble aimed at beating back what one observer called the "psychosis" overtaking the market in recent days.
Now they'll get their IMF money
"They're doing what's proved to work in the past, which is to tighten rates," said Robert Hormats, vice chairman of Goldman Sachs International.
Hormats added that the rate move would likely spur the International Monetary Fund to disburse the latest $700 million installment on a three-year $10 billion loan program to Russia. The Kremlin has recently intimated that it may seek even more aid to buttress the ruble and reboot the economy.
"They'll get their IMF money and that should help a little bit," Hormats said.
The new rate marks the highest level since February 1996. In a measure of how the crisis has gathered pace, the refinancing rate stood at 30 percent last week. The rate is widely seen as a cap to treasury bill yields, which soared 20 points to around 80 percent at one stage Wednesday, and a tool to defend the battered ruble.
Analysts say a stabilization package of the kind offered by the IMF is crucial if the Russian government hopes to persuade its own citizens as well as outside investors that it is serious about reducing its deficit and spurring reform.
President Boris Yeltsin himself nodded to these concerns Tuesday when he ordered spending cuts of more than $6.5 billion, or about 12 percent, in the fiscal 1998 budget.
$200 billion socked away abroad
Russia depends heavily on overseas investment to help finance its budget deficit. Hence, any exodus of that capital is viewed as a major threat, since it erodes confidence in the sovereign currency and, by extension, devalues Russian assets in market-value terms. Analysts estimate that Russians have socked away more than $200 billion abroad since the early 1990s.
Getting even a small portion of that money back would help the country enormously at a time when it is facing a wage-arrears crisis of mammoth proportions, and is trying to push through the privatization of a major state-owned oil company, Rosneft.
In a setback for Russia's economy, no serious bidders had materialized for the company as of Wednesday, at its initial offering price of $2.1 billion.
For Russia's bankers, the interest rate jump marks a stunning strategic about-face less than six months after the government expressed hope it would be able to lower the rate to 14 percent, from 21 percent in November.
The obvious peril behind such a drastic rate hike, analysts say, is that, the government will have less money in the long-term for other vital purposes, including infrastructure reforms and debt reduction. But experts say the immediate benefits far outweigh these downsides.
"I think that this is what we call a cold shower," said Aleksandr Rappoport, the vice president of Grayson, Auerbach & Co., a New York investment firm. "We need a cold shower. This is a brutal but brave measure. Money will now come in to the market. Maybe we will see concrete results tomorrow… All the measures that the government has taken here are meant to give immediate results."
Before the Central Bank stepped into the fray, Russian short-term government security yields had soared 20 percentage points to 80 percent Wednesday. Earlier, the Finance Ministry had placed its 294-day t-bill -- known as a GKO in Russian -- at 61.07 percent.
In a related development, the IMF's chief Russia specialist said Wednesday he saw "no objective case" for devaluing the Russian ruble, the move feared most by overseas investors. Echoing the Russian Central Bank's view, John Odling-Smee argued that the current economic travails stemmed from a crisis of confidence, and not from a shortage of hard currency reserves.
"There is no objective case for devaluing the ruble in terms of Russia's competitiveness of exports and the medium- to long-term flows of capital," Odling-Smee said, answering questions at a seminar in the Kyrgyz capital of Bishkek.
-- from staff and wire reports
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