Huge drop in rouble value causes alarm

Devaluation: Russians queue to buy dollars and fear price hikes as opposition speaks of nation going bankrupt

AFTER ASSURING Russians last week that their currency was safe, the government effectively devalued the rouble yesterday by raising the ceiling of its exchange rate against the dollar. The result will be a fall in the currency's value of up to 34 per cent.

The measure, calmly announced by the Prime Minister, Sergei Kiriyenko, was met with howls of protest from opposition politicians who spoke in dramatic terms of the people's trust running out and of the country finally going bankrupt.

Queues built up at banks as Russians tried to buy dollars, though there were no reports of any unrest.

The de facto devaluation, part of a package to "defend the national economy", was agreed at a meeting between Mr Kiriyenko, Anatoly Chubais, Russia's negotiator with the International Monetary Fund, and Boris Yeltsin at the President's country mansion, Rus, on Sunday.

Mr Yeltsin broke his holiday to see his Prime Minister again in the Kremlin yesterday and, a few hours after the meeting, it was announced that the country's chief tax inspector, Boris Fyodorov, was being promoted to the post of Deputy Prime Minister.

The government's economic defence package widened the corridor in which the Central Bank supports the rouble to a range from 6 to 9.5 to the dollar. At the end of the day yesterday, having observed the markets, the Central Bank set a rate of 6.43 roubles to the dollar for today.

The government also imposed a three-month moratorium on the payment of rouble-denominated foreign debts, though it called this "restructuring", not "default". Moscow also banned foreigners from investing in short-term treasury bills.

Briefing reporters, the Prime Minister, in office only since the spring, admitted the measures were "harsh and radical" but promised Russians that they would not lead to inflation. On the contrary, Mr Kiriyenko said, faced with economic crisis, the government had had to choose between "inflationary politics" and adopting these tough policies. "We are balancing the budget without inflation," he said.

The Finance Minister, Mikhail Zadornov, said the moratorium on debt payments would help the state to meet its obligations to workers and pensioners.

The head of the Central Bank, Sergei Dubinin, explained that the government was trying to help domestic producers and punish financial speculators who have been fleeing from Russian markets.

The measures would "put an end to the period when one of the most profitable enterprises in Russia has been financial speculation", Interfax news agency quoted him as saying.

The latest Russian crisis began last week when the billionaire fund manager, George Soros, suggested that the rouble should be devalued by 15-25 per cent. In the market panic that ensued, Mr Soros was reported to have made a profit for his fund of $107m by currency trading.

To calm the hysteria, government ministers swore there would be no devaluation.

"It will not happen - I say that firmly and clearly," President Yeltsin himself declared during a trip to Novgorod last Friday.

So it was with undisguised glee that opposition politicians yesterday accused the government of betraying the people's trust.

"Yeltsin said there would be no devaluation," crowed his arch-enemy, the Communist leader, Gennady Zyuganov. "Now comes this blow to the poorest. Prices will jump. All but the biggest banks will collapse. This is final bankruptcy."

The end of the world was also nigh in the view of Nikolai Ryzhkov, a former Soviet-era premier who now heads the leftist People's Power group in the State Duma, or Lower House.

"The crack has occurred, this is the convulsion of the economy," he pronounced.

Such comments were a foretaste of the outburst that can be expected from parliamentary deputies when they meet for an extraordinary session on Friday. There were suggestions that Communists and nationalists might push for a vote of no confidence in the government.

Other Russian politicians were more measured. Even the ultra-nationalist enfant terrible, Vladimir Zhirinovsky, while accusing the government of "drawing its calculations on sand", called for calm.

The economist Pavel Bunin said the government's measure was a devaluation, whether it liked to call it that or not, but a "controlled devaluation".

The stabilisation package was welcomed by Russia's top 12 banks, which described it as an "appropriate" response to the economic crisis.

Yego Stroyev, head of the Federation Council, or Upper House of parliament, also voiced support, saying that "in critical moments, unconventional approaches are required". Perhaps the most perceptive comment came from Gennady Seleznyov, the Speaker of the Duma and a moderate Communist. "To be honest, I fear that ordinary people will panic," he said.

For in this crisis, psychology is as important as reality. Ordinary Russians have been cheated by the state many times before and are still not very literate in the ways of capitalism. Yesterday they stood in line, as once they queued for bread, desperate to buy dollars.

Business, page 12

Leading article,

Review, page 3

Norman Stone,

Review, page 4