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Crisis prompts rate cut calls

New Russian default threat
WESTERN banks and investors who were forced last week to swallow $8bn-$10bn (pounds 4.8bn-pounds 6bn) in losses when Russia defaulted on its treasury bonds are waging an intense campaign to stop Russia from defaulting on $150bn in sovereign and corporate debt, according to City sources.

The fight puts Western bankers at the heart of the Russian crisis. Its outcome could influence the mood in the world's stock markets this week as they seek to bounce back from their worst battering since the Crash of 1987.

"There is a mood of extreme pessimism about Russia now," said a City banker in contact with the Russian government. "But there is a chance the pessimism has been overdone."

On Saturday, acting prime minister Viktor Chernomyrdin declared in an NTV television interview in Moscow: "We have already joined the world economy, and there will be no return to the past."

Mr Chernomyrdin said in the same interview that the rouble, which has been devalued 34 per cent since the start of the crisis, will remain convertible. In an effort to stem the panic outside locked banks last week, he reiterated the previous government's promise of a 100 per cent guarantee on all bank deposits.

"I want to say to the depositors of commercial banks: You needn't worry, you will get your deposits," he declared.

In his remarks, however, Mr Chernomyrdin offered no hint of what he plans to do about Russia's sovereign and corporate debt. Currently, there is a 90-day moratorium on interest payments owed by Russian companies to foreign creditors.

Western bankers calculate that $15bn-$20bn in interest on Russia's sovereign and corporate debt will come due between now and the end of 1999. Russia's dollar reserves, they say, now stand at $13bn, with $5bn of that sum in gold.

"The optimistic scenario is that Chernomyrdin shuts down the economy for six months, builds a political consensus for the reforms that haven't worked so far, then comes back for a new IMF package," said Marcel Cassard, a Russian specialist at Deutsche Bank in London.

But Mr Cassard hedged his optimism. "Social unrest" could bring even greater chaos to the country, he warned. The rouble's collapse could prove uncontainable. The big busi- nessmen with political connections backing Mr Chernomyrdin, led by former maths professor and car dealer Boris Berezovsky, remain an unknown quantity.

"There is no rule of law in Russia," said Jean de Bolle, Global Asset Management fund manager. "This means that the economy has not worked at the micro-level. If Chernomyrdin is to succeed, he must persuade the oligarchs that their interests are best served, not in getting control of the next barrel of oil reserves, but in creating a climate in which the value of shares in Russian oil companies goes up."

As Mr Chernomyrdin struggled Friday and Saturday to broker a deal between Russia's oligarchs, reformers, Communists in the Duma, the Russian parliament, Group of Seven finance officials, and private Western bankers, the central bank took over Russia's largest retail bank, SBS-Agro, and said it would be closed for two weeks.

Other Russian banks held emergency discussions about consolidation. Western banks saw opportunities in the inter-bank market, in which banks borrow and lend money to each other, which closed down 10 days go.

"Our two Western strategic partners have said they will stand by us," declared Yuri Kudimov, first deputy chairman of National Reserve Bank. "Standard Chartered Bank has said they are used to situations like ours, and recognise there are opportunities in inter-bank loans where gold and precious stones are involved."

But Western bankers along with everyone else will operate in the dark until Mr Chernomyrdin makes hard choices providing evidence of what sort of economic policies he will pursue. The new government must take urgent steps to improve tax collection. It must restructure the banking system.

If Mr Chernomyrdin can satisfy Western bankers and investors holding the $150bn in Russia's foreign debt, he may find more support from private capital markets than seems possible today. "The scandal in the Russian crisis is how badly the IMF has handled it," said a US investment banker in London last week.

"How could they give $60bn to Korea, $40bn to Indonesia, and only $20bn to Russia?"