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. Last Updated: 07/27/2016

Warnings by Soros Send Markets Into Panic

Fears of a ruble devaluation sent Russian markets into panic Thursday as interest rates on government debt leapt and the stock market was shut down after a huge drop.

Markets have shown increasing concern this week that Russia is on the edge of a debt default, but Thursday's panic was aggravated by a letter by financier George Soros in The Financial Times. The letter said Russia's financial crisis had reached a "terminal" stage and called for a 15 percent to 20 percent ruble devaluation to cure it.

Prime Minister Sergei Kiriyenko talked down the crisis Thursday, saying that the government would be able to pay off its debts for August and September "calmly" and that the run on markets was based on emotions and not fundamentals.

"There will be no changes in the monetary policy of the Central Bank and the government," Kiriyenko said during a one-day trip to the Ural Mountains city of Perm, local news agencies reported.

The Central Bank also explicitly ruled out a devaluation. The bank's deputy chairman, Denis Kiselyov, said Soros' proposal for a devaluation "will not allow us to resolve the tasks facing the government but it will agitate financial markets and create ideal conditions for speculators."

International Monetary Fund managing director Michel Camdessus also chimed in Thursday. "Russia must continue to withstand the pressures it is facing and implement the tough measures we have just agreed upon," he said.

Russia worked out a $22 billion rescue package with the IMF last month. Kiriyenko has pledged to implement a fiscal austerity plan agreed to with the IMF.

But in the past two weeks, confidence in the economy has once again waned as the lower house of parliament, the State Duma, has delayed discussion of tax hikes, the world economic situation has worsened and the price of crude oil, Russia's major export, has tumbled.

The Central Bank Wednesday introduced emergency measures both to control speculation against the ruble and to save some Russian banks faced with bankruptcy.

Markets opened Thursday in a mood of panic. On the market for government debt, interests rates on one-year treasury bills averaged 149 percent, up from 127 percent Wednesday, while one-month bonds shot up to 160 percent from 55 percent.

The equities markets continued their steady plunge, with The Moscow Times Index of 50 leading shares closing at 71.1, down 8 percent from Wednesday. Trading on the Russian Trading System, the country's main trading floor, was suspended temporarily for the second time this week after stocks plunged 15 percent in early trading.

The Central Bank managed, however, to keep the ruble within its target band above 6.299 to the dollar.

International rating agency Moody's downgraded Russia's sovereign foreign debt from a rating of B2 to CAA1, a level given to many poor African countries. Standard & Poor's, the other major rating agency, cut Russia's rating to B- from B+.

"There is a lot of fear and panic," said Eric Jayaweera, a fixed income market analyst with MFK Renaissance. "People are no longer asking if the government will devalue the ruble, but when and how."

Soros concurred in his letter with many analysts who say Russian banks are trapped in a web of speculative borrowing as a result of the crash in T-bill prices. They are being forced to buy dollars to pay back some of the loans they have taken out using T-bills as collateral.

This prompted the Central Bank to protect its currency reserves by instituting a temporary limit on banks' purchases of dollars. Both banks and their customers are worried about the devaluation and hoping to translate as many rubles into stable currency in case mayhem breaks out.

The limits on dollar purchases were lifted later in the day, but on the condition that banks paid their rubles one day before they received the dollars, a rule that also discourages buying dollars.

The Central Bank announced its reserves had fallen from $17.5 billion to $17 billion.

The Central Bank's other headache is the threat of a wave of bankruptcies as banks struggle to pay exorbitant interest rates. The Central Bank offered more banks the opportunity to receive overnight credits, Reuters reported, a move that will offer shaky banks a temporary lifeline.

Yet fears for banks remain. The Central Bank said Wednesday it had limited trading with some banks it considered troubled. Tokobank announced Wednesday it was unable to pay a foreign syndicated loan of $60 million.

Analysts and economists said that despite the government's reassurances, investors are no longer convinced of the current government's ability to pull Russia out of its economic mess.

"The markets both fixed income and equity, are voting that they are not convinced the government has its stuff together," said Mikhail Dorfman, vice president of Aton investment group. The continuation of the crisis, despite the IMF's package, is becoming a hot topic of debate. U.S. President Bill Clinton has taken particular interest in Russia's financial scrape, summoning top economic advisers to the Oval Office on Wednesday and asking how Russia's government was faring.

Market analysts said investors were nervous knowing David Lipton, the U.S. Treasury Department's undersecretary for international affairs, was in town and "discussing something." Lipton is officially here preparing for Clinton's Sept. 1 summit with President Boris Yeltsin, but it is believed he is also feeling out the current economic straits.

Soros' proposal was to devalue the ruble by 15 to 20 percent and then create a currency board to hold the ruble pegged to the U.S. dollar or the Euro, similar to systems used in Argentina and Hong Kong.

"The devaluation is necessary to correct for the decline in oil prices," Soros said, adding that the government needed $50 billion in reserves to defend its currency, and calling for the Group of Seven to put up $15 billion to help get Russia there.