INSIDE FINANCE: Primakov Fall No Tragedy, All Turns on New Cabinet

There is an opinion that countries' economic and financial situations react sharply to the fall of governments or even of ministers. In many countries this is very much the case.


After announcement of U.S. Treasury Secretary Robert Rubin's resignation, the Dow-Jones index instantly obeyed the implicit command to "lie down!"


Yet Russia is not the same. In recent years experience has shown that our economy reacts not to the retirement of an old government, the cessation of preceding outrages are often met with a relief. Instead, the shock comes when the new government is sworn in.


A new staff, as a rule, fulfills all the worst fears during the wait. The fall of Viktor Chernomyrdin's Cabinet was a prime example. The financial sphere reacted calmly to the end of Chernomyrdin and for the ensuing three weeks did not give out any negative signals. Investors did not flee from the stock exchange. Nobody bought up hard currency.


The troubles began in early May when Prime Minister Sergei Kiriyenko was approved by the State Duma and formed his Cabinet.


Foreign investors, which at the time were strongly represented in Russian markets, became bewildered because many foreign players were unable to see in the new government any body whom they were confident would be able to carry out sensible financial politics in a difficult situation.


By the time Kiriyenko was sacked, foreign investors had run away. Local inhabitants were frightened half to death by devaluation. After reading the Cabinet list that contained names like First Deputy Prime Minister Yury Maslyukov and Deputy Prime Minister Gennady Kulik, nobody expected anything from the new government but monetary emission.


That is why residents and market participants actively continued buying dollars, sending the ruble down well below the level that would have been determined simply by the printing of money alone. The three-fold and then fourfold devaluation of the ruble was purely and simply due to psychological factors.


Meanwhile, the smug, calm, Brezhnev-style demeanor of Prime Minister Yevgeny Primakov calmed even the pensioners. Their pensions were reduced by half in order to make it feasible to pay them on time and they muttered nary a murmur.


The default of Aug. 17, 1998, allowed Primakov to save money on domestic debt, but with overseas debts matters were rather more difficult. In the end, creditors were offered a variation on the death by a thousand cuts method. First the government declined to pay one kind of debt, them another, then a third type and so on.


Considering the government's stagnant record, the market's reaction to its demise reminds one of nothing more than the jerkings of a corpse when galvanized by an electric shock. The man is dead, and he remains dead. But as the volts course through him he twitches as though he were alive.


The panicky 15 percent fall in the prices for Russia's illiquid publicly traded firms during one session was nothing but a supercharged overreaction. Firstly, the oscillations around zero always look larger in percentage terms than they really are. Secondly, the falling stock prices simply eliminated the false dawn that had been brought on by the previous two weeks of shallow optimism brought on by Maslyukov's success in bringing cash back from Washington.


The fall of the ruble followed the same principles. In this area, the government's demise even acted as a pressure valve. The fierce warnings and heavy-handed administrative measures the Central Bank had used to govern the foreign exchange markets meant that the banks had accumulated gigantic sums of free-floating rubles on their correspondent accounts. The banks simply had nowhere else to take their money. The sudden fear of high inflation or a political cataclysm overcame their terror of the Central Bank.


The people - hardened by the more extreme currency fluctuations of last fall - shrugged at the whole show.


In reality, creditors, potential investors and Russian citizens are all far more concerned about the make-up of the new government, when it arrives. What will it be like? If the president calls on the Communists, then what little remains of the economy will wither away under a lethargy similar to Primakov's, whether or not the IMF-demanded tax laws are passed. If the government turns out to be energetic and uncompromising, then it will be possible to reckon on a revived stock market, fresh international loans and new investment.


Irina Yasina was a bank spokeswoman under former Central Bank chairman Sergei Dubinin.