MEMBERS OF THE seven richest industrialized nations met in Paris last week in an emergency session on Russia's economic crisis. As the government of President Boris N. Yeltsin struggles to keep its reforms intact, Russia's stock market has plunged amid worries that the nation's mounting debt -- more than $33 billion in debt payments are due this year -- could lead to a devaluation of the ruble. What is behind the instability in Russia? How can its emerging market economy stabilize? What are the consequences for the United States and the world economy if those efforts fail?
Lacy H. Hunt
Executive vice president, Hoisington Investment Management, Austin, Texas
There were a whole set of structural problems in the Russian economy that were apparent before the latest crisis. My feeling is that the immediate cause of the current problem is not wholly due to internal structure but to the continuing problems in Asian markets. The problem is that the Asian economic crisis is spreading to Russia.
Russia mainly produces commodities and other labor-intensive products. The demand for these commodities is falling. For example, the price of oil recently fell from $23 to $15 per barrel, and this, I think, is a direct result of problems in Asia. You have one widely used index that is at an 11-year-low. This has hurt Russian trade and budget positions.
Primarily, Russia is held hostage by the international economy. So, whatever direction the global economy goes, so goes Russia. If the country were stronger internally, maybe it could diverge from that dependence, but that won't happen anytime soon.
Assistant professor of political science, specializing in political economies of industrial democracies, Johns Hopkins University.
Three basic things. First of all, there is no real cash worth anything. You have 80 percent of assets still controlled by the government; thus Russia's actual economy is not totally free for all like it is here. One of the other obvious problems is simple liquidity, and to function as a good economy, tax revenue is needed desperately.
Russia's industries aren't privatized enough to provide a solid tax base. When you have paramilitary units knocking down doors to collect liquid assets, obviously taxation efforts aren't going well.
If current trends continue, the populace may look to a more authoritarian government for a solution. This is why you can't really have instability in Russia, because this area, which makes up roughly one-seventh of the world's land mass, is strategically important to Europe and the United States.
For the foreseeable future, you might have an anti-democratic sentiment in Russia. This undermines the confidence in the integration of financial markets. If Russia drops out of the globalization loop, there could be some serious economic, and definitely political, results down the road.
Market analyst, Ruesch International, Washington
A couple of weeks ago, Russia was looking to sell one of its last state-owned oil companies. The problem was, no bids for the company emerged. You had a crisis erupt because it then appeared that Russia wasn't going to be able to meet its short-term obligations, and this comes at a time when things are continuing to go sour in Southeast Asia.
Russian stocks took a hit, and to stem the outflow of capital, Russia raised its interest rate to 150 percent.
Basically, where we're at now is, in the last week or so, we've seen a calm. The country has since cut the rate back down to 60 percent, but problems remain.
Russia has a short-term obligation to fulfill, and they've lowered their asking price for this oil company to $1.6 billion, down from the initial asking price of $2.1 billion. The country has been asking the International Monetary Fund to issue funds, but the IMF withheld payment because of Russia's inability to collect taxes efficiently. Russia has taken steps to collect those funds and show that they can meet obligations.
A lot of these problems stem from corruption. Russia is rooting out what it feels are corrupt liabilities in order to demonstrate its commitment to reform. If IMF funds are restored, you could see improvements in confidence. Russia and the IMF have an accord worth $670 million.
Certainly, any time you see an economic crisis, it causes political crises as well as the decline of individual faith in a particular system. In Russia, this can feed to more nationalist parties striving for stability.
President, S.J. Rundt & Associates Inc., New York
The biggest problem is that the government is running a system with a large deficit and has to borrow heavily because of inability to collect taxes. Altogether, Russia has $60 million outstanding. Every week, it seems that Russia tends to pay back and then borrow more money. It's a vicious circle really. Roughly one-third of all government expenditures go to making interest payments.
It can sell Rosneft Oil -- its last state-owned company -- and some of its telecommunications interests, but eventually tax collection has to be dealt with. This downturn could adversely affect the economies in Germany, Hungary, Poland, Ukraine and some of the other Baltics.
Pub Date: 6/14/98