Rocked by fall-out from the Asian crisis, depressed oil prices, labour protests and other domestic problems, Russia's woes are proving to be a baptism of fire for the Prime Minister, Sergei Kiriyenko.
His problems were compounded this week by the government's failure to auction the state oil company Rosneft, long hailed as the showpiece of the privatisation programme. Mr Kiriyenko had hoped to raise $2bn (pounds 1.25bn) for the gaping state coffers by selling a 75 per- cent-stake. He decided to press ahead in spite of complaints from potential buyers that the starting price was too high, given world oil prices.
Leading expected contenders, which include consortia containing BP and Royal Dutch/Shell, stayed away. No one bid, forcing the Kremlin back to the drawing board. A new auction date will be set on Monday, but the government has cut the opening price to $1.7bn.
Mr Yeltsin countered by signing an "+ plan", cooked up by Mr Kiriyenko, to slash spending by $10bn - 12 per cent of the 1998 budget. Although a proportion of the cuts were a foregone conclusion, as the government never had a hope of raising the tax revenue to fund them, some will be real.
The country is already echoing with the clamour of victims of market transition, from angry miners, unpaid pensioners and forgotten scientists to a crumbling army and workers in the education and health system. But the President's move was welcomed by the IMF, which has sent a senior official to Moscow. The fund is still mulling over the release of the next $670m tranche of a $9.2bn loan agreed in 1996.
Matters were not helped by rumours in Moscow that, after pumping reserves into propping it up, the government will devalue the hitherto stable rouble - sacrificing one of the Yeltsin administration's triumphs in the difficult transition to a market economy.
Mr Kiriyenko yesterday reiterated his determination to defend the currency, as interest rates rose to their highest level since February 1996. It remains to be seen if this will soothe the nerves of the small stock market, which - after a stellar performance - recently slumped by 50 per cent.
A central part of Russia's problem is that the government is caught in a snare. It is under intense political pressure to pay wages and pensions, despite low tax revenues, meagre foreign investment, and a post-Soviet record low income for oil.
If the situation worsens, there will be a political price to pay - notably in the presidential elections in 2000. Nationalism, anti-Westernism and a general distaste for reform is already simmering.
To find funds the government it has to borrow, but it can only lure investors by offering hefty returns, diverting their money from vital investment in the infrastructure.Reuse content