August 30, 1998

Summiters At Moscow Will Wrestle With Ruble Rubble

Watching Russia self destruct is an awesome event for those of us who struggled through the Great Depression. It was global then and could become so again if the Asian economic meltdown is not halted soon.

Harbinger of the economic 1930s disaster was the stock market. It plummeted as debt soared beyond reasonable expectations of repayment through trade. Banks holding too much loan paper failed.

Capitalism -- the engine of world economy -- exacted a terrible price for redressing the balance between supply, demand and credit.

Moscow harpies are calling for Yeltsin’s resignation. President Clinton, beneficiary of a seeming cornucopia, goes to Russia tomorrow to advise President Yeltsin about the latter’s moribund economy. One has the feeling it is a lame duck summit.

Clinton ’s economic team of Treasury Secretary Robert Ruben and Federal Reserve Chairman Alan Greenspan has kept money circulating by lowering interest rates. Unfortunately this sucks working capital from banks and bonds into sideline real estate and stocks. The latter investments simply rotate money within a closed circle of speculators.

In Russia’s case, the speculators were those bureaucrats who milked the communist apparatus for personal fortunes. When government businesses were thrown onto the open market in a rush to capitalism, communist fat cats bought the facilities for a fraction of true worth.

Old guard communists also managed to keep natural resources -- oil, gas, gold and alloy minerals -- in government hands on the basis they were militarily too vital to be turned over to private owners.

Russia ’s salvation is to lease its natural resources to private enterprise. Caspian Sea oil would bail out the country in a matter of months.

Entrenched leaders in Russia and most Asian countries after World War II tried to be just a little bit pregnant with capitalism. They permitted little, privately owned businesses but kept major production facilities and investment funds tied to the same old, crony networks.

While the domestic Russian economy withered, neo-communist industrialists pumped $10 billion into new military hardware -- a major share of the U.S.-backed loan of $22.6 billion from the International Monetary Fund.

Yeltsin, sick and not too swift in the upper story anyway, could not cope with the pull between reformers and the exploiters. Five months ago he fired Viktor Chernomyrdin, an old guard prime minister who formerly managed Gazprom, Russia’s state-owned oil and gas conglomerate.

In his place, Yeltsin appointed Sergei Kiriyenko, a staunch reformer who devalued the Russian ruble and defaulted $40 billion of debt.

This hurt the average workers. However, it was more devastating, relatively, to the old guard. Mortgages held by banks were reduced one-third in value. IMF loan repayment totals jumped one-third. Everybody screamed.

Yeltsin lost his nerve, fired Kiriyenko and last week reinstated Chernomyrdin who previously had undermined the economy by rescinding back taxes owed by industries, withholding pay of miners and spending borrowed money on military projects.

The last shred of confidence in the Russian economy vanished. Ruble holders fought last week to buy U.S. dollars with rubles suddenly worth only 9 U.S. cents. The three largest Moscow banks merged to conserve liquidity and suspended sales of U.S. dollars.

As the rest of the world pays the piper for overspending, U.S. speculators also rush back to the safety of working capital. Thursday’s 357-point plunge in the stock market is a wake up call. Another is the Commerce Department report that economic growth in the second quarter this year fell from 5.5 percent for the same period last year to a seasonally adjusted 1.6 percent this year.

The ruble rubble has angered Russian reformers and pseudo-capitalists alike. Yeltsin has no friends except, maybe, Clinton. The most that the U.S. President can offer the Russian president is to try and persuade Congress to pump another $18 billion of taxpayers’ money into the IMF for relay to Russia.

Better yet, they could study President and General Ike Eisenhower’s farewell address cautioning the post-World War II political leaders about the dangers of peace:

“In the councils of government we must guard against the acquisition of unwarranted influence -- whether sought or unsought -- by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.

“There is a recurring temptation to feel that some spectacular and costly action could become a miraculous solution to all current difficulties.

But each proposal must be weighed against the need to maintain balance between the public and private economy, between cost and hoped-for advantage, between essential requirements as a nation and the duties imposed by the nation upon the individual.”

On second thought -- knowing the penchant of Clinton and Yeltsin for painless fixes -- their time together might be well spent working on their resignations.

By Lindsey Williams, columnist for Sun Coast Media Group newspapers