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Crisis As Usual

© Jeffrey Deutsch

Disaster didn't strike when the miners did. There haven't been mass strikes, let alone mass governmental resignations or mass revolts. The Communists did indeed put forward their expected motion to impeach President Boris Yeltsin, and it was signed by 215 of the Duma's 450 deputies, well above the one-third minimum for active consideration.

On Thursday, June 4, interest rates were lowered from 150% to 60%. But, at last report, they were still higher than when the crisis began, and they are still completely abnormal. The economic (and political) implications of these interest rates have already been discussed in my preceding article.

The West is more than willing to give Russia some help, at least in more traditional ways: US Deputy Treasury Secretary Lawrence Summers (who traditionally deals with foreign economic relations) has announced that the Group of Seven, or G-7 for short, supports Russia's reforms and is willing to help Russia through the International Monetary Fund. This was later backed by statements from US Treasury Secretary Robert Rubin, and this came after Yeltsin secured statements of support from German Chancellor Helmut Kohl and British Premier Tony Blair.

The Group of Seven consists of the US, Germany, the UK, France, Italy, Canada and Japan. I consider Japan Western in the sense that she is politically aligned with the "real" Western countries in international politics, has commensurate wealth, and notwithstanding her rather paternalistic system of government and society at home, nonetheless in many respects partakes of Western technology and ideas.

The world-famous debt evaluation specialists Moody's and Standard & Poor's have recently again downgraded Russia's debt. In other words, they are advising people considering lending money to the Russian government that the likelihood of its being paid back on time in full is less than it was before. Both services have for some time considered these investments "speculative grade" instead of "investment grade".

Speculation means buying something with the hopes of reselling it for a higher price, whereas investment is making such purchases with the hope that as one holds onto them, they will increase in value accordingly. Speculators count on temporary large fluctuations in the price of investments. In other words, these people are literally saying that you are better off on average buying Russian bonds with the idea of selling them to someone else at some point before they mature, when their price has temporarily risen, than to hold them until maturity and expect to be paid back in full (in real, not nominal terms - a distinction that will become much more important if inflation - now at 12% - increases).

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