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Russian rate rise reassures
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May 28, 1998: 7:54 a.m. ET
Traders seek IMF aid to sustain market confidence after interest hike
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NEW YORK (CNNfn) - Russian financial markets regained some confidence on Thursday after an emergency interest rate increase and hopes that the International Monetary Fund (IMF) would help the nation stabilize the ruble.
The benchmark Russian RTS stock index opened up 6.57 percent at 199.53 after falling around 11 percent on Wednesday in a panicky day of trading described as a "so-called meltdown" by analysts.
However, although traders said the Russian central bank's decision to triple interest rates to a vertiginous 150 percent on Wednesday had helped to keep dollars from fleeing Russia, they warned that the rate was not sustainable.
Instead, they looked to the IMF for an estimated $5 billion in support.
"The general expectation is that there will be some kind of package from the IMF over the weekend," said an emerging market debt trader in London. "The IMF situation represents everything. If the IMF stands by Russia, the market should do okay but if we don't get words of support, then the concern is how can we lower rates again and we are back to square one."
However, Mark Mobius, managing director of Templeton Funds, said that IMF intervention would not solve Russia's problems.
"What Russia needs is investor confidence," he said. "The government has got to reform the tax system so it's sensible . . . and it also must reform this whole stock exchange and capital markets system."
Regardless of the possibility of an IMF bailout, the Russian central bank intervened heavily in currency markets on Thursday, buying dollars against strong demand for scarce rubles following the rate hike. Earlier in the week, the central bank drew down its dollar reserves to buy up rubles, making the Russian currency scarce and propping up its value.
Overnight rates, an indication of ruble demand, rose to 200 percent on Thursday from around 150 percent late on Wednesday.
President Boris Yeltsin also lent his strong support to the ruble, vowing that the government would protect the currency from devaluation.
"Foreign investors should feel confident there will be no collapse of financial markets in Russia," Yeltsin said during a meeting with Prime Minister Sergei Kiriyenko, his finance minister and central banks chairman.
"There should be confidence that investors do not flee but rather come to Russia. The bank and finance ministry have enough reserves today to hold on."
Despite Yeltsin's comments, not all traders were convinced.
"Their foreign reserves are down," Mobius said. "Usually when governments claim they will not devalue, just the opposite occurs (and) if the ruble is devalued then there will be political fallout, so I think they must protect the ruble at all costs."
However, while Mobius said the ruble was important to Russia, he did not see the ruble as being as crucial as the rupiah or other Asian currencies are for their respective national economies.
"Most of the Russian economy is not a ruble economy, it's a barter economy," he said. "I would say about 50 percent of the economy does not deal in rubles. A lot of people think in dollar terms and deal in dollar terms already - for example, the stock exchange quotes prices in U.S. dollars, not in rubles." 
-- from staff and wire reports
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