MOSCOW -- After two days of shock, dismal reality began settling in here yesterday. The ruble fell 10 percent, three large banks merged to avoid failure, sociologists raised the prospects of huge public protests and foreign investors were told they should expect enormous losses.

The new prime minister, sounding as if he hadn't been listening to the news, said he would try to avoid tough economic measures.

"It's incredible watching it fall apart so quickly," said Al Breach, an economist working with the Russian government. "I think a lot of people just really don't get it."

The shock began Sunday night when President Boris N. Yeltsin issued a terse decree firing the government of Prime Minister Sergei V. Kiriyenko, who had embarked on a painful course of cutting government expenditures, increasing tax collections and possibly allowing insolvent banks to fail.

Those steps -- encouraged by reformists and demanded as a condition of billions of dollars of loans from the West -- apparently threatened Russia's financial tycoons. Pressured by them and feeling politically vulnerable, Yeltsin resurrected his former prime minister, Viktor L. Chernomyrdin, a former industrialist who is considered safe and accommodating by the tycoons.

In nominating Chernomyrdin -- who must be confirmed by the State Duma, parliament's lower house -- Yeltsin said in a statement on Monday that he intended to ensure stability.

Almost immediately, the earth began to shake even harder.

The ruble, which was at 6.2 to the dollar 10 days ago, dropped by a precipitous 10 percent yesterday. It fell from 7.14 to the

dollar to 7.86. All across the city, exchange points closed because they were out of dollars.

"Who wants to own a ruble now?" asked Breach, who works for an agency set up by the European Union to help the Russian government.

Three tycoons, Vladimir Potanin, Mikhail Khodorkovsky and Vladimir Gusinsky, agreed yesterday to merge their banks: Uneximbank, Bank Menatep and Most Bank. Faced with a liquidity crisis, they struck a deal. "It's a very strong alliance," said Yevgeny Vittenberg, an economist with the Independent Institute of Social and National Problems, "and makes it more likely the state will assist them."

The government faces a crisis of confidence, said Mikhail Gorshkov, director of the institute. Today, nine out of 10 people describe the situation here as a crisis or disaster, he said.

"We are talking about an all-time low of public confidence in the government and all the ruling structures," he said. "That is an all-time low in the years of reform."

If the government cannot begin inspiring confidence, he said, perhaps as many as 25 million to 30 million angry citizens will take to the streets in early October, when a nationwide protest is planned.

Against this mood, Chernomyrdin struggled to cope.

He approved a plan to restructure $40 billion in debt, news nervously awaited by foreigners who hold more than $11 billion in bonds. The terms require investors to move into longer-term loans, which will pay them an estimated 30 cents on the dollar and leave them with losses around 70 percent. A portion of the loans can go into dollars, though at a much lower interest rate than the loans remaining in high-risk rubles.

In an interview published yesterday, Chernomyrdin said he intended to give industry more government support.

"The priorities will be: first, the defense of social interests of the population, the paying of pensions and salaries," he said. "And second, a government industrial policy, since purely monetary means did not pull Russia out of crisis."

He said that tough measures might be required, but told reporters, "I plan to do everything to try to manage without that."

Economists were astonished at the idea of a "government industrial policy," taken to mean plans to pour more money into industries that aren't producing.

"I had so much hope for this place coming out of its history," Breach said, his voice full of sadness and disappointment. "They need the political will to sit down and say, 'We're going to make it better.' They need to start doing the hard stuff. Instead, this country is slipping into being producers of raw materials with some subsistence farming by people around their dachas, with the state administering morphine in terms of devalued pensions and occasional wages."

Investors are fleeing. Elf Aquitaine, a French petroleum company, said yesterday it planned to back out of a proposed deal to invest more than $500 million in Sibneft, a Russian oil firm. Elf blamed the "volatile investment climate" here.

Andrei N. Illarionov, director of the Institute of Economic Analysis, told a press conference yesterday he was pessimistic about the prospects of a Chernomyrdin government -- which has not actually been seated and may well include the Communist opposition.

Russia's GDP dropped by more than 30 percent from late 1992 to early this year, when Chernomyrdin was prime minister, he said.

"This is a record figure among all countries and nations," Illarionov said. "Naturally, this has resulted in a drastic decline of living standards, in huge damage to the demographic, intellectual, financial and economic potential of the country."

Only great infusions of cash could help now, he said, and inevitably, the government will begin printing money. The ruble could fall as low as 15 to the dollar this year.

"It means that there will be a great surge of inflation," Illarionov said. "The ruble exchange rate will fall much more dramatically than recently. All this will lead to cuts in production and falling living standards, with all the consequences that entails, including political consequences."

Against this bleak economic landscape came grim political speculation. What if President Yeltsin left office before the end of his term in 2000, forced out either by ill health or political pressure?

"The Yeltsin era came to an end yesterday and the day before yesterday," said Vyacheslav Nikonov, president of the Polity Foundation. "The crisis in the country is only beginning."

Pub Date: 8/26/98