Russia Not Another Mexico, Experts Say

LONDON -- Investors and analysts, while seeing similarities between Russia now and Mexico in December 1994, aren't concerned that Russia's cash shortage will turn into a ruble crash like the 1994 freefall of the Mexican peso.

When Mexico devalued the peso Dec. 19, 1994, it had about $17 billion worth of bonds to pay within six months and not enough reserves to cover those payments.

Russia now has about $14.7 billion in foreign exchange reserves, including gold, not enough to cover $33 billion in debt payments this year. Last week, yields on Russian Treasury bills rose to 74 percent and the central bank tripled interest rates to 150 percent to support the ruble, which heightened investor concern that its deficit may become too large to finance.

That's where the similarity ends, analysts say. The problems are different, and so are the solutions.

"There's no comparison to Mexico," said Jerome Booth, head of emerging markets research at ANZ Investment Bank. "Mexico had fundamental reasons to have a cheaper currency. It had a balance of payments problem and a current account problem. Russia doesn't."

Russia has a trade surplus and a current account that, at worst, will run a modest deficit in 1998, analysts said.

"Currency crises are balance-of-payments driven," said Barbara Peitsch, Eastern Europe economist at Santander Investment Securities. "A currency is overvalued when exports can'tcompete anymore. Russian exports aren't expensive; they're still quite competitive on world markets."

Russia's problem "is on the budget side,'' Peitsch said.

The government ran a budget deficit equal to 6.5 percent of its economic output in 1997. Earlier this year, it aimed to cut that deficit to 4.7 percent of gross domestic product. In the past week, the government, under the leadership of its new prime minister, Sergei Kiriyenko, said it will additionally cut spending by 40 billion rubles ($6.5 billion) and raise revenue by 14 billion rubles.

While fiscal austerity is key to Russia's recovery, as it also was important for Mexico, there are also major differences.

The crash of the peso ultimately helped the Mexico economy by making its exports more competitive, while analysts say a ruble crash would not achieve the same result in Russia.

"The IMF doesn't seem to favor devaluation because it wouldn't help Russia like it did Mexico," said Jack Walsh, who oversees $300 million in emerging market debt for IBJ International. "Mexico had its exporting lines ready, so that if the peso weakened by 40 percent it just meant it sold 40 percent more of goods, so it helped."

Furthermore, Russia has less need for an emergency loan to cover its debt payments than Mexico did in 1994, analysts say.

Investors expectations that the International Monetary Fund or other governments would come through with money was enough to help Russia sell more than $2 billion of ruble and dollar debt Wednesday, raising enough cash to cover its $1.2 billion of maturing securities this week.

That allowed yields on government bills to fall below 50 percent and the central bank to lower interest rates to 60 percent Thursday.

"This is a short-term crisis of confidence, a domestic liquidity problem," said Christopher Portman, an emerging market economist with ANZ. "Russia doesn't need a bailout," and the possibility of a loan from the IMF or other governments "is just to restore market confidence."