INSIDE FINANCE: Economic Realities Provide Hangover as New Year Starts

There are no miracles in economics. The upbeat conclusion to 1998 might almost have made you doubt this truth. Look at what happened. In those final two weeks, the ruble exchange rate almost stabilized. The announcement that Russia's foreign creditors had rejected a proposal for rescheduling its debts passed without any obvious negative consequences. And the State Duma passed a tough budget at first reading. It was a New Year's fairy tale.


The whole country went off on holidays intent on partying from the first glass raised for Western Christmas to the hangover after Old New Year on Jan. 14.


No one paid any attention when some of the few members of the State Statistics Committee who have not been put in jail announced that inflation in December was 11 percent.


But the second week of the new year has forced a lot of people to rub their eyes and accept that fairy tales are not for real and reality tends to serve up the events that common-sense economics predicts.


First, the exchange rate. In only four trading days, the ruble fell below 23 to the dollar. This fall will continue. The causes are obvious. It is the pressure of the ruble money supply that was pumped into the economy in the last quarter of 1998. The holidays are also to blame. Exports have stopped but imports must still be paid for.The response of monetary authorities has been predictable. Central Bank chairman Viktor Gerashchenko and his team are drawn by their whole life experience to the idea of recreating a state monopoly over foreign exchange and - even better - over foreign trade and banking.


The Central Bank's instruction of Dec. 31, which increased to 75 percent from 50 percent the share of export earnings that must be sold back in Russia, is a step in this direction. The ruling means that every company must take 75 percent of all export earnings and, within seven days, use the dollars to buy rubles.


Of course, if you need dollars to pay for imports or repay loans, you will have to change the rubles back into hard currency on the same day. You could, alternatively, not receive any money on your account but instead ask your foreign customers to send payments direct to your foreign creditors and suppliers. That way the firm will save on banking commissions but it will mean an outflow of capital for Russia as a whole.


And whatever brain-teasing instructions Central Bank deputy chairman Viktor Melnikov, who controls hard currency regulations, dreams up to police the new rule, thousands of entrepreneurs will work out ways around them.


Unfortunately, decisions such as increasing the level of compulsory hard currency sales cannot stop the fall of the ruble so long as inflation and inflationary expectations are growing. Yet, each point that the ruble drops is a blow to the professional reputation of the Central Bank's management.


The desire to avoid this, albeit cosmetically, is what is driving the Central Bank to use a multitier rate system, which amounts to a restriction on currency convertability.


The hard currency market is already divided into two parts. On one hand, there are the special morning sessions on the Moscow Interbank Currency Exchange to which only a select group is given access. On the other, there is general trading at which the rate is already quite different from the special sessions. And the gap is likely to grow. And soon there will be the ruble accounts opened as partial repayment for foreign investors in T-bills. This money cannot be sent to either official trading session.


The budget too might run into bad luck. Already 200 amendments to the draft have been proposed for the second reading. They all, not surprisingly, involve increasing expenditure. The deputies see two ways of funding the increased deficit. One is minor but unpleasant - cutting spending on bureaucracy. The other is major but unfathomable - cutting expenditure on debt servicing. The deputies apparently haven't noticed that the figure for debt servicing in the budget is already only half what Russia is supposed to pay. The logic behind this is obvious. If we can't pay for everything, let's pay nothing at all.


This all amounts to a sobering up after December's euphoria between the government and the parliament. After all, the deal was always based on arithmetically perplexing figures. How could it have been possible that inflation would be 30 percent and the ruble exchange rate would stay at 21 to the dollar for the whole year? "Well, that's what we want !" said the government and the parliament in unison, apparently making a wish to Father Christmas.


The International Monetary Fund mission, which hits Moscow at the end of this month, will get the role of a belated Father Christmas. But it is highly likely that Father Michel Camdessus' sack will again be empty. And then the question will be what action Russia's patient foreign creditors will take.