Yesterday's partial recovery will not undo the damage. The issue is not the proper exchange rate. There was a case for some devaluation in order to improve the terms of trade. This may explain the government's initial inaction. But a free fall is another thing. What Russia needs most of all is confidence - in itself, its government, its currency and its future. It also needs the confidence of Western investors. There was little enough in all these areas before Tuesday. Now there is less.
Yet the cause of the rouble's fall was not just government incompetence, although there is plenty of that. As the G7 finance ministers made clear just over a week ago in Madrid, when they sent away a poorly prepared Russian delegation that had come in search of assistance, Russia's achievements do not look entirely real. The reduction in inflation has been achieved largely by cutting programmes, not paying workers and letting debt between different enterprises run into thousands of billions of roubles. Nor is even 4 per cent a month considered low enough by the IMF - 1.5 per cent is the target.
Russia is still living largely by improvisation, personal connections and the unofficial economy. Whether workers receive their pay depends as much on the political connections of their bosses as on whether they have produced anything for the market. When, on his summer tour, Boris Yeltsin met car workers in Krasnoyarsk who complained that they had not been paid for two months, he simply promised to send a 'plane with money.
Confidence is not increased by the political disarray around President Yeltsin, with rivals circling for the kill and even supporters beginning to distance themselves. The significance of Yeltsin's failure to come out of his aircraft to meet the Irish Prime Minister was not so much that he may have been drunk but that no one in his entourage had the authority to take the situation in hand and make decisions in his place. Equally worrying is that he had left behind a group of advisors who warned him to take care. Lack of self-knowledge can be worse than drinking.
The immediate danger is that, with confidence shaken, the government will have to spend more than it can afford on propping up the rouble. Reportedly it has already spent dollars 90m, with reserves down to dollars 4-5bn. Now that the lending rate has been raised to 170 per cent the strain will be acute. Beyond that looms the danger of more political uncertainty than the country can afford.Reuse content