Russia down, but not out
As Russian woes deepen, uncertainty remains investors' watchword
NEW YORK (CNNfn) - In Soviet times, whenever rain threatened to wash out a big parade, Kremlin kingpins would beat Mother Nature into retreat with a liberal sprinkling of cloud-dispersing chemicals.
Russia's current leadership -- or what remains of it, at least -- undoubtedly wishes it could do the same with the typhoon currently raging around their country's battered market and banking system.
Russia's market forces, however, answer to a different master than May Day parades: The global economy.
The rejection Monday by Russia's Communist-led parliament of President Boris Yeltsin's nominee for prime minister, Victor Chernomyrdin, promise to prolong the investor uncertainty that has become the watchword for emerging markets in recent days and weeks.
Chernomyrdin, who served as prime minister from 1992 to 1998 before being ousted in March, was once again being touted as the anchor Russia needs to stay its course and head off a plunge into the abyss.
But the opposition-dominated Duma rejected that logic in a 253 to 94 vote that analysts see as little more than political brinkmanship aimed at wresting a few more concessions from Yeltsin and his nominee.
But for all the sound and fury emanating from Moscow Monday, analysts said the short-term prognosis for investors remains essentially the same: murky and muddled, pending the articulation of a firmer course for Russia's whiplashed economy.
Paper-thin Russian share volume
Russian shares ended lower again Monday on extremely thin volume of just over $1.5 million. The benchmark RTS1-Interfax index fell 1.74 percent to close at 65.61, amid expectations for a continuing downturn in the wake of parliament's rejection of Chernomyrdin.
"I think the market pretty much expects this, and no matter what (happens), you're going to continue with thin volumes," said Richard Hisey, a portfolio manager with Lexington Troika Dialog Russia Fund. "Even 2 percent or 3 percent up or down a day, that's very thin volume. It doesn't take very much volume to get things to move, and what you really see is most investors are sort of sitting on the sidelines."
On Russia's main foreign exchange market, the Moscow Interbank currency exchange, or MICEX, trading remained suspended Monday by Russia's central bank.
The bank banned ruble trading last week after political events in Moscow, spurred by the ouster of reformist prime minister Sergei Kiriyenko, swirled out of control. As the ruble plummeted, store owners jacked up their prices, while others simply shut their doors.
On Monday, the central bank set its official rate for Tuesday at 9.3301 rubles to the dollar, down from an August 29 level of 7.905 rubles.
The enormity of Russia's political and economic woes, however, belie the country's relative insignificance as a global market force.
The total stock capitalization of Russia's stock market is about $10 billion, smaller than most medium-cap American corporations and less than one-third of Bill Gates' estimated personal worth.
Countries such as Germany, which is by far Russia's largest trading partner, are expected to weather the crisis with minimal trauma, even though losses for certain banks with high exposure could total in the multibillions.
Russia accounts for about 1.2 percent of global GDP.
Inflation remains relatively tame
Measured against the magnitude of Russian mayhem past, the current financial implosion is yet to reach a terminal stage. In 1992, in the wake of an abortive putsch attempt against Mikhail Gorbachev, Russia was in thrall to hyperinflation of 2,500 percent, a level reminiscent of Germany's Weimar Republic before the war.
In that same year, gross domestic product contracted 19 percent, as privatization took its toll on moribund industries. Today, by contrast, inflation is still below 20 percent and doomsday forecasts call for zero GDP growth this year -- hardly a cheering prospect, but a far cry from the dismal state of affairs in the early 1990s.
However dire Russia's current situation may seem, Hisey notes, it is not hopeless.
"They can manage their way through this crisis," Hisey crisis.
Western politicians echoed this sentiment Monday as they sought to shore up confidence in Russia's ability to patch itself back together through consensus and sage economic policies. At the same time, they voiced wariness that failure to act could spell disaster.
"I do not consider it necessary to call a meeting of G7 leaders, but also do not rule out a meeting," German Chancellor Helmut Kohl, one of Russia's strongest allies, said Monday. "I do not think a summit would help at the moment."
Any outcome for the crisis, however, is fraught with problems. A compromise that would give the Communists a foothold in power, or more, would likely mean bailing out banks and paying off wage arrears to millions of disgruntled workers. Either step could fuel inflation.
On the other hand, the introduction of a currency board, as proposed Friday by International Monetary Fund chief Michel Camdessus, would require tens of billions of dollars in reserves to back a fixed rate for the ruble.
An even darker scenario would be the dissolution of the parliament, something Yeltsin could theoretically resort to in the event the lower house were to reject Chernomyrdin three times.
"The likely consequence could be very messy elections at a time when the country is most fragile," said Charles Blitzer, the chief economist with Donaldson Lufkin & Jenrette. "The instincts to print money and spend in order to get the voters' favor will be infinitely increased, and the chances of hyperinflation would go up that much faster."
U.S. President Clinton is clearly anxious to avert such an impasse. On Monday, as he prepared to leave Washington for a summit meeting in Moscow with Yeltsin, Clinton asserted the West should support Russia if it pursues market-style reform.
He warned that any reversion to a Soviet-style command economy would backfire.
"If Russia will stay on the path of reform, I believe America and the rest of the West should help them," Clinton said. "What I want to do is to go there and tell them that the easy thing to do is not the right thing to do. The easy thing to do would be to try to go back to the way they did it before, and it's not possible."
In the short term, analysts believe, Russia may seek to resolve its problems through wheeling-and-dealing that results in a mixed bag of Communist-style controls and clubfooted market reforms.
--By staff writer Douglas Herbert, with additional reporting from wire reports