Western investors will also start to feel a new chill, argues Peter Torday

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The Independent Online
YEGOR GAIDAR's abrupt departure from office is likely to deal a severe blow to widespread foreign support for Russia's economic reforms. Although the common perception is that Russia has received little of the promised Western credits - a view sometimes fostered by the Russian government's Western advisers, dollars 8.5bn ( pounds 5.4bn) of the Group of Seven's dollars 24bn ( pounds 15.4bn) assistance package was disbursed to Russia in the first six months of the year. A further dollars 5.6bn ( pounds 3.6bn) was promised by the end of June, but has not yet been delivered.

If Russia now turns a cold shoulder to the reform process, the flood of Western support will probably dwindle to a trickle. For a start, a big question mark hangs over negotiations to turn the recent dollars 1bn ( pounds 650m) loan from the International Monetary Fund into a full credit of dollars 3bn-dollars 4bn. Equal doubts must surround the promise of annual support from the World Bank of a similar size.

To senior IMF and World Bank officials, and their counterparts in the Group of Seven industrial states, Mr Gaidar symbolised Russia's commitment to reform. The dismay now being expressed by Western officials privately will spread very quickly to foreign investors, if it has not already done so. Without the IMF/World Bank seal of approval on Russia's economic policies, what foreign confidence exists in Russian business opportunities may quickly fade.

The most immediate consequence, however, could prove very costly for Russia. Tomorrow and Friday, the Paris Club of Western creditor nations meets to consider a Russian request for a long-term stretching out of debt repayments and servicing costs on the foreign debt of the former Soviet Union. Almost half the dollars 67bn ( pounds 43bn) of foreign debt falls due for repayment between 1993 and 1995, and it is a racing certainty that the removal of Mr Gaidar has prejudiced the chances of agreement.

The practice of the Paris Club is only to reschedule the foreign debts of debtor countries that have embarked on economic reforms, or at the very least made binding promises to that effect. Without outside help, the theory goes, billions of dollars would go on debt-servicing payments that could otherwise be used for reform. In practice, the Russians say they have not got the money anyway and have hinted at default, a move that would further damage their relations with the world financial community.

Agreement with the Paris Club was never going to be easy. But creditor governments are highly unlikely to delay interest and capital payments for several years ahead if Russia starts to pump new credits into unviable enterprises, lets the budget deficit rip, allows the threat of hyperinflation to become real or halts incipient privatisation in its tracks.

Enticing big foreign investment into Russia (and the other former Soviet republics) has been an official objective since Mr Gorbachev gained power. But it has never been achieved because of government regulation and the absence of a commercial legal code or clear set of principles governing property rights (to say nothing of an unresponsive distribution system).

After the 1991 coup attempt and the dissolution of the Soviet Union, Western business inquiries into Russian opportunities grew sharply, despite the recession. If the uncertainties about Russia's economic reforms mount, however, this interest will vanish. Even the oil companies, the buccaneers of the promised business invasion, will be cautious. Large oil and gas deals have largely failed to materialise. In an environment that is more hostile to the shift to a market economy they seem even less likely.

Unless the ditching of Mr Gaidar is unexpectedly accompanied by a retention of his policies, President Yeltsin will be threatened by a repetition of the liquidity crisis of late 1991, when capital fled Russia in huge amounts. Western officials and investors are hoping that somehow Mr Yeltsin will prevail over the conservative challenge to his reforms. But they are not optimistic.