Confidence in Reform Shaken by Ruble's Fall

THE Russian government's economic reform efforts took a heavy blow as the ruble fell by a record amount on Oct. 11, plunging 27.4 percent against the United States dollar.

The Russian currency crashed from 3,081 rubles to the dollar on Oct. 10 to 3,926 on Oct. 11 in a sudden and unforeseen burst of trading, as dealers on the currency exchange market rushed to stock up on US dollars.

Russia's Central Bank hardly moved to support the ruble, intervening only at the last moment to stave off an even more massive fall.

Central Bank officials, who had been putting the brakes on the ruble's devaluation for most of this year, abandoned its support at the end of September. Since then, the Russian currency had lost 20 percent against the dollar until the record slide Oct. 11.

Crumbling confidence

A continuing free fall in the Russian currency would be certain to undermine business confidence in the government's economic policies, in the absence of any clear signs from the Kremlin about its financial policy.

Foreign investors, key to President Boris Yeltsin's plans to consolidate market-oriented economic reforms, are bound to be put off by wild currency fluctuations.

The Central Bank says the ruble's travails are due only to speculation, and it refuses to spend money that speculators would profit from. It has already spent some $2 billion this year to control the fall in the ruble's value, and foreign exchange reserves now stand at $5 billion.

But other analysts see deeper reasons for the turmoil on the currency markets and suggest that the Oct. 11 shock could be salutary for the government.

``Maybe the current government took it for granted that the situation would not change drastically even if they did not follow a tight policy,'' says Rair Simonyan, head of a private economic consulting firm in Moscow. ``Perhaps they will now be more cautious in spending and allocating money.''

Inflation, which had been held down to below 4 percent a month for most of this year, rose to 7.7 percent in September, following the release of massive government credits over the summer to the agricultural sector and to military industries.

``The government thought it could live with a careless [fiscal] attitude,'' Dr. Simonyan says. ``They might have been misled by positive economic indicators to think their actions would not be so disastrous.''

Refuge in the dollar

Bankers say the run on the ruble could be halted later this week if the Central Bank sells dollars again, and because the supply of rubles with which dealers buy dollars was drying up, with overnight ruble interest rates hitting 250 percent Oct. 11.

And Russian businessmen, who had begun dealing in rubles as happily as in dollars, may well take refuge again in the dollar, observers here warn.

``The situation is quite dangerous,'' Simonyan says. ``One of the last government's main achievements was relative stability in the monetary system, which created a precondition for sound economic behavior. But it is hard to behave rationally with developments like this [run on the ruble], which you cannot fully explain.''

Although the long-term reform trends seem well established and unassailable by any amount of financial turmoil, the pace of changes ``can be slowed down or speeded up,'' Simonyan adds. ``This sort of thing, making the situation less predictable, does not help.''