Government Spending Sparked Ruble Plunge

The ruble's 845 point plunge Tuesday brought out the worst elements of Russian politics: reformers claiming sabotage, Cold Warriors claiming a Western plot and anti-Semites claiming a Zionist attempt to take over the world.

The bottom line, however, is that the government has spent too much money.

Indeed, the ruble's plunge, it's logical causes -- from the government's attempt to escape its debts to the incompetence of the Central Bank to profiteers abusing an exchange mechanism -- begs questions about recent optimism on the success of Russian reforms.

"In the West we've tended to see Russian reforms as happening through two extremes: either falling apart or fantastic," one Western economist said. "The ruble crisis shows that the truth lies somewhere in between. The way the government reacted is almost as important as the crash itself."

The government has been reacting strangely. President Boris Yeltsin set up a commission headed by the Federal Counterintelligence Service in order to search for culprits.

Meanwhile, the Central Bank slapped new rules on the Moscow Interbank Currency Exchange that make speculative trade much more difficult. The bank also pumped millions of dollars into the ruble, leaving its hard currency reserves dangerously low at $1.8 billion, Interfax said.

The measures helped, at least temporarily. On Friday, ruble trading closed at 2,988 to the dollar, up six rubles from Thursday's close of 2,994.

But the intervention left many economists and dealers saying the Central Bank had acted intrusively, propping up the currency instead of letting it find its own market level.

"I would have been happier if the government hadn't bothered to intervene," one Russian broker said. "And the way they did it was so over the top. They always overreact. It shows how we still don't know what we are doing."

The primary cause behind the ruble's decline is that the government keeps printing money and issuing easy credit to prop up inefficient Soviet companies, economists say.

Enterprises, which are still mostly state-owned, have compiled monstrous debts, failing to pay workers or suppliers. As the ruble falls, it becomes cheaper to pay bills. Meanwhile, managers horde dollars, getting rich as the ruble falls.

"If these companies were to pay their debts it would certainly ease the ruble's problems," said Frank Ter Borg, an economic and commercial counselor at the Dutch embassy. "But they have no incentive to do that."

The incentives for change faded sometime in April, when the government began easing its tight monetary policy, economists say. By July, the Central Bank was essentially giving away money to the army, farms and factories.

But according to Harvard Professor Jeffrey Sachs, Prime Minister Viktor Chernomyrdin knew that inflation would not show up for months. Chernomyrdin was hailed as a hero, the International Monetary Fund promised new credits and Russian inflation dipped under 5 percent a month.

Now the Central Bank is almost broke and monthly inflation reached 7.7 percent in September. The prime minister also abandoned his land and agriculture reforms, and made no progress on securities laws.

But the Russian people suffer the most from the ruble's crash, as product prices and the value of their wages go up and down. "We are constantly walking on the brink of abyss," Economics Minister Alexander Shokhin said earlier this week.

Some hope did come from this tense situation. Russia's fledgling capital markets weathered the ruble's troubles well. The Moscow Times Index generally increased through the tumultuous week. And foreign companies, despite the risk, still consider Russian investments a good buy.

"People spend too much time looking at the government," said Konstantin Melnikov, head of foreign relations at the Moscow brokerage firm Rinaco Plus. "If this government's economic reforms collapse, so what? There will be another government that will continue reforms. We have started towards market reforms and we're not turning back."