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"G7 silent as Russian Economic Crisis Looms"

by Viktoria Wosk & Rose Bulaong

Volume 2, Issue 3
Saturday, May 16, 1998 12:30 p.m.

BIRMINGHAM - The G7 has lost its chance to talk about Russia's troubled economy at the Birmingham Summit. Other international concerns such as Indonesia's flare of violence and India's unexpected nuclear tests have overshadowed the economic agenda normally tabled at the forum.

Prior to the official launch of the G8 summit, there was a valuable opportunity in informal discussions between the G7 to discuss Russia's difficulties before Russia joined the table last night.

The Asian financial crisis had severe repercussions on the Russian economy. The Central Bank faces depleted reserves after defending the ruble between October and January. It has lost one third of its hard currency reserves, from $US24-billion to $US16-billion dollars. Interest rates have risen to 40 per cent, up from 20 per cent a few months ago. This has meant their debt costs have risen substantially while their budget revenues will likely suffer due to slumping oil prices. The rouble has shed 1.5 per cent in recent days and the Russian trading benchmark RTS index ended down nearly 15 per cent on the week at a 16-month low.

Russian President Boris Yeltsin signed a decree last Thursday stipulating the government will cut expenditures if there is a budget or funding shortfall. Analysts predict as much as a quarter of government expenditures will not be fulfilled. The markets would not support the placement of new Russian debt which Yeltsin needs to repay loans due last week. In the near future, Russia faces 250-billion rubles of short-term debt due over the next year.

The European Union is concerned about Russia's export reliances on resources. An EU spokeswoman said Russia should be exporting more industrial products.

There is much at stake, since Russia is the EU's third largest trading partner next to the US and Japan. Sixty per cent of foreign investment in Russia comes from the EU; and 45 per cent of exports go to the 50 European nations. A positive sign occurred April 27th, when Russia was taken off the EU's list of countries of non-market economies.

One solution to the economic turmoil is admission to the World Trade Organization. Yeltsin has been lobbying since the Denver summit last year for entrance to the club of trade partners. But President of the European Commission Jacques Santer confirmed he wants to see progress on laws concerning tax reform, foreign investment and the elimination of trade barriers before that can happen.

The G7 economic talks could have addressed some of these concerns. But by failing to focus on Russia's economic reforms, a significant opportunity has been missed.

Politically, however, the focus of attention on other pressing economic and political crises allows Yeltsin to escape G7 criticism. In Birmingham, Russia can play up its full inclusion as one of the world's richest nations.

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