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. Last Updated: 07/27/2016

NEWS ANALYSIS: Primakov's Six Weeks Magically Confused




The prime minister asked the world to send food; the finance minister said not to bother. Newspapers reported the government had an anti-crisis program; the government responded angrily that this was a lie and reassured the world it had no program at all. And while there has been talk of the most extreme measures imaginable f from outlawing the U.S. dollar to monopolizing the alcohol trade to offering cheated Western investors decades-old Nicaraguan-Soviet debt as a consolation prize f only the most timid and contradictory steps have been taken at all.


Six weeks ago to the day on Friday, Yevgeny Primakov was approved as prime minister. "Do not expect quick results if you confirm me. I am not a magician," he warned on the eve of his Sept. 11 confirmation vote at the State Duma. It is indeed still difficult to point to results f assuming that "results" means "improvements."


But the performance has been that of a magician f complete with disappearing ministers, escape artist oligarchs, and an exchange rate sleight of hand at the Moscow Interbank Currency Exchange, or MICEX, where the government restricts trading and so can artificially fiddle with the results. The ruble even strangely and obediently levitates about once a month, always in the days before batches of dollar forward contracts come due.


Primakov took charge at a time of absolute chaos. The government, broke, had just admitted it would not be able to pay the $40 billion in ruble-denominated obligations it owed by year's end to Russian and Western holders of its high-yield treasury bills. Nor would it be able to prop up the ruble at its proud rate of six to the dollar.


Treasury bills were frozen. The default crashed the Russian banking system, and scrums of frustrated depositors gathered outside Moscow bank offices. The ruble plummeted faster than has any national currency in recent world history f until a September ruble was buying just a third of what an August ruble had bought. Prices rose, notably on imported food, and grocery shelves became barer.


The default also handed Western financial institutions losses of more than $100 billion, the London-based Fitch IBCA rating agency said in a report last month. If Fitch is correct, that would make Russia 1998 the largest single credit loss ever taken by the international banking community f dwarfing even the Mexican peso collapses and the Latin American debt crises of the 1980s and 1990s. The Mexican and Latin American meltdowns had concentrated huge potential losses in the biggest banks in the United States and so put the world financial system in danger. As a result, the International Monetary Fund and the U.S. Federal Reserve rapidly organized bailouts.


By contrast, Russia's far larger losses were less damaging to the system because they were spread across a far broader spectrum of investors, Fitch's report said.


But Russia is not necessarily through falling, and it may still take many a foreign investment down with it. The treasury bill default was about just $40 billion in ruble-denominated debts f but Russia owes another $150 billion in hard currency to the rest of the world, including another $3 billion by year's end, and a dangerous crunch awaits in 1999 of $19.2 billion in interest and principal. Meanwhile, the country's three largest cities f Moscow, St. Petersburg and Nizhny Novgorod f have their own dollar-denominated Eurobond debts, and Nizhny Novgorod is also on the verge of default.


The Primakov Cabinet seems unprepared to deal even with short-term woes, much less with the muted horror that is this longer-term debt.


Primakov was always frank that he knew little about economics. In his first tentative steps he brought in two Soviet-era managers f Yury Maslyukov as his top deputy on economic policy, and Viktor Gerashchenko to head the Central Bank.


Maslyukov was a particularly worrisome choice: A former head of the Soviet central planning agency, Gosplan, he was a co-author of an economic plan presented in 1996 by Gennady Zyuganov, the Communist Party chief, that called for the eventual mass nationalization of the economy. Since his appointment, barely a week has gone by without Kommersant Daily or Interfax shrilly reporting that Maslyukov is contemplating some or another coercive measure f to monopolize trade in the U.S. dollar, to monopolize the banking system, to monopolize the alcohol industry.


Maslyukov has denied considering some of the more extreme measures attributed to him. But according to Kommersant Daily, Maslyukov is actually being frustrated by a trio of right-thinkers. These are Primakov, the liberal Finance Minister Mikhail Zadornov f and Kommersant Daily itself, which has whipped up public hysteria by publishing supposed drafts of wild-eyed government programs.


As a counterweight to Maslyukov, the prime minister tapped Alexander Shokhin, an ardently free-market politician, as another deputy. Shokhin made confident-sounding noises about wooing back Western investors, but in trial balloons he offered them boneheaded sweeteners f such as a chance to let them trade worthless treasury bills for vouchers to use in future Russian privatizations. He also suggested that other nations Russia owes billions to might instead accept securities based on Cold War-era debts that the Third World owes Russia.


The IMF was unimpressed, and distracted with its own crisis f trying to get a truculent U.S. Congress to extend it another multibillion credit line. After just 10 days in office, Shokhin resigned.


Amidst this chaos, Sverdlovsk governor Eduard Rossel walked out of Boris Yeltsin's office earlier this month claiming that the president liked his suggestion that Russia outlaw the U.S. dollar on its territory. Public reaction was an earthquake. The head of the Kremlin administration, sensing the first tremors, had to summon reporters back within 15 minutes of Sverdlovsk's remarks for a damage-control session, and Primakov went on television to reassure the country the dollar was not to be touched.


That was actually a rare moment of unified, purposeful action.


More typical has been the sight of Primakov calling on the European Union to supply food aid while Zadornov counters that it is not necessary. Or the claims by the Prosecutor General's Office that the entire financial crisis may be a criminal plot. "Not everything is clean there," said Prosecutor General Yury Skuratov last month in announcing his investigation of the Kiriyenko-era Central Bank.


Although at first stunned by the crisis, Russia's oligarchs, meanwhile, seem set to thrive amidst the government's aimlessness. Gazprom has struck attractive barter deals on its tax debts, while the oil companies have successfully ganged up to defeat Zadornov's talk of taxing them more heavily.


Even the bankrupt banks seem unsinkable. When the Central Bank floated them loans to pay off their depositors, the banks paid no one and with impunity bought dollars. When the Kremlin sought to impose temporary adminstration on the two retail banking giants, SBS-Agro and Inkombank, overnight civil court cases materialized to block that. Since then, the leading oligarch-bankers have met with the Cabinet f and emerged to express approval for a bailout plan that looks likely to save the big banks by taking over their liabilities.