INSIDE FINANCE: Time for Russia to Return To the Borrowers' Market

In a civilized economy most governments borrow money. Many countries cannot form a sensible economic policy without a functioning program of domestic and foreign borrowing, and Russia is no exception, as has become all too clear in recent months. Even Gennady Seleznyov, the Communist speaker of the State Duma, intoxicated by the victorious appointment in September of Bolsheviks to the government, has stopped demanding an end to any form of borrowing, seen as the remnants of capitalism.


To the leaders of the government, Prime Minister Yevgeny Primakov and First Deputy Prime Minister Yury Maslyukov, it is patently obvious that a system of borrowing must be restored, but from whom does the Russian government intend to borrow? One would think that after the Aug. 17. default there could not possibly be any talk of fresh loans.


But looking at the experience of other countries that have survived similar crises, a return by the government to the borrowers' market is not only possible but necessary in order to overcome the consequences of a financial catastrophe. Just a year after their respective crashes, the governments of Argentina, Mexico and Latin-American countries confidently sold securities on international markets, and Turkey was able to balance its budget and stabilize its financial system with fresh domestic borrowing.


Last week the Russian government showed its wish to restart domestic debt trading by re-launching trading in long-term bonds unaffected by the decision of Aug. 17, as well as the new bonds into which defaulted state treasury bonds have been converted.


But this does not necessarily bring the government any closer to the prospect of new borrowing on the domestic market. Generally if a government wishes to regain confidence, it starts with a clean sheet by selling new short-term papers - valid for a month or maybe just a week - so that investors can see that they really are redeemable. Only after this is it possible to bring old redrafted securities back onto the market.


Russia did it differently, with trading opening in securities that have been defaulted on once already. Moreover, the government's 1999 budget is so full of inconsistencies that it can hardly serve as convincing proof of future fulfillment of debt obligations. As was to be expected, the starting price of securities was extremely low and the level of return expected by investors was excessively high. In the first sessions of trading, many banks were going to quote prices anticipating an annual yield of 200 percent and over. At the last moment the Central Bank set a limit of 120 percent, which reduced trading to next to nothing.


With the Russian market in its current condition, looking for new loans would be suicidal. But if the cap on yields is removed and existing securities are allowed to fall to their natural price, there may be unpleasant consequences, particularly for holders of state bonds whose balances will take further losses. And with Sberbank being the largest holder of state bonds, one can easily imagine what will happen if the more than 100 billion rubles ($4.47 billion at Tuesday's official rate)of Sberbank's assets are repriced at their true market value, possibly leaving the bank unable to meet its obligations before the public. When customers figure out the implications, they will make for the bank en masse and try to withdraw their savings.


For this reason, the Central Bank is probably busy devising some new individual method of accounting for Sberbank, but whether the auditors will agree with it is another matter.


One more indication that a serious restoration of T-bill trading was less than serious is last week's resignation of Andrei Kozlov, the first deputy chairman of the Central Bank. The T-bill market he had lovingly built up since 1993 turned out to have one serious technical flaw in that the Central Bank automatically covered the obligations of the Finance Ministry, even if the latter was insolvent. This was the main source of conflict between their respective heads in July 1998, and only served to intensify the eruption of the crisis in August.


For people like Kozlov, the actual nuts and bolts operation of the market was as important as politics and economics, but the current Russian government is free from market mania and clearly regards all that happened on the MICEX as a pointless game.


Talks behind closed doors with government and international officials are far more understandable to Maslyukov. But even in this environment there are unpleasant surprises: The IMF has not been accommodating and has found fault with both the new budget and the tax collecting innovations of new tax chief Georgy Boos. But this aside, it is obvious that the IMF can't avoid at least having to restructure Russia's old debts. Otherwise Russia just won't pay at all, leaving IMF officials to explain their oversights and bad judgment.