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. Last Updated: 07/27/2016

Markets See No Threat to Reform in Shuffle




President Boris Yeltsin pledged Monday that his decision to sack his government was aimed at breathing new life into Russia's economic reforms. Financial markets have given him the benefit of the doubt so far.


Russia's stock market plunged in the morning on news of the dramatic reshuffle but rebounded after Yeltsin went on television to promise reforms would continue. The Moscow Times Index of 50 leading shares plunged 6 percent in the morning, but ended the day up almost 1 percent.


Markets were initially concerned that the whole Cabinet was to be dismissed. While economic reform chief Anatoly Chubais and Prime Minister Viktor Chernomyrdin were dismissed, markets were heartened by news that many other key Cabinet ministers are expected to retain their posts.


"The course of reform in Russia is irreversible," Chernomyrdin said at a farewell news conference. "The rules of the game for business ... will remain stable but will, of course, be improved."


Chubais, who said he had long wanted to step down from his post as first deputy prime minister, said the hand of reformers would probably be strengthened in the new government. "Most of the Cabinet ministers will retain their posts," Interfax quoted him as saying.


Economists and investors cautiously welcomed developments, saying they could give a much-needed boost to efforts to overhaul the economy.


"This was clearly not a coup d'etat against the reform faction," said Eric Kraus, the chief strategist at Regent European Securities in Moscow. "It appears to be a step forward for the reform camp."


Analysts noted that, with Russia now recovered from the aftershocks of Asia's financial crisis, the dismissals had been carefully timed to limit their destabilizing effect on markets.


They also applauded the appointment of Fuel and Energy Minister Sergei Kiriyenko as acting prime minister. Kiriyenko, an ally of First Deputy Prime Minister Boris Nemtsov, has been a strong supporter of efforts to clean up the debt-ridden energy sector and open up the oil industry to foreign investment.


Although it is uncertain whether Kiriyenko will be asked to stay on as prime minister, the market interpreted the move as an indication that Nemtsov and other reformers would remain in government.


Some analysts welcomed the reshuffle as a sign that Yeltsin was cutting the government's links to Russia's powerful financial groups, which have been accused of skewing economic policy to their benefit. Chernomyrdin is closely linked to Gazprom, Russia's gas monopoly, while Chubais has been accused of taking bribes from Vladimir Potanin, the head of the oil, metals and finance group, Uneximbank.


Both Potanin and Gazprom are expected to bid for Rosneft, the last major oil company in state hands. Bidding in the auction was due to start this week, but the Cabinet reshuffle has raised doubts that the sale will go ahead as planned.


On the other hand, some analysts still suspect that Boris Berezovsky, a business tycoon and the master of Kremlin intrigue, is behind the shake-up. Berezovsky returned to Moscow over the weekend after a month's absence in Switzerland, where he was allegedly recovering from a sore back.


But Chubais denied that the country's rich financiers had a hand in the government's dismissal. On the contrary, "They woke up in a cold sweat this morning," he said.


Analysts took heart from the news that Chubais, viewed as a key reformer, is likely to retain some role in Yeltsin's "team." Chubais said he is still in the running to be the chairman of the board of Russia's electricity company, Unified Energy Systems. The government has already nominated Chubais for the post of chairman at an upcoming shareholders' meeting April 4.


Most analysts said the Cabinet upheaval made it more likely that Chubais would take the reins at UES and remove the Soviet-era directors who still dominate the board. "It definitely increases Chubais' chances of being chairman at UES," said Greg Alton, an analyst at the Moscow investment bank Troika Dialog.


Although many analysts were cautiously optimistic about the ultimate outcome of the Cabinet shake-up, the uncertainty and upheaval is expected to throw a wrench into plans to tighten the budget.


Over the weekend, Yeltsin cited the problem of wage arrears as a major concern. Wage arrears to public-sector workers grew by 21 percent last month, reaching 7.636 billion rubles ($1.2 billion) as of March 1.


But ironically, the appointment of a new Cabinet could delay measures needed to tackle the problem. The government had been expected to raise at least 1 billion Deutsche marks ($545 million) Monday through its first Eurobond of 1998, but it postponed the issue in light of the political turmoil in Moscow.


The bond launch, which could help the government pay its debts, is now expected to be delayed until a new prime minister is sworn in.


Analysts said the rejigging of the Cabinet also could delay passage of the government's draft tax code, which had been due for a first hearing in the State Duma on April 16. "There will be less time to discuss the tax code in the Duma, because everyone will be distracted by political issues," said Alexander Morozov, an economist at the World Bank in Moscow.


Morozov said efforts to bring order to the government's finances and eliminate wage arrears would take time. "Any new government will face the same problems," he said.