Russia: Yeltsin's Desperate Gamble

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The Russian people have been lied to for centuries. Generations of Czars spun visions of a world that eventually proved to be an illusion. The communists, their ideology and the Soviet state turned out to be illegitimate as well. Little wonder that today's citizens are confused and distrustful, wondering what, if anything, they can believe in. For the most part, they do not trust their government, and the administration of President Boris Yeltsin is not helping. It talks reform but hasn't been able to deliver fully. It bills its economy as a free-market system when it actually is a hybrid between robber-baron capitalism and state control. And now it is snatching away the greatest accomplishments of the painful Yeltsin years: a stable ruble and low inflation. On one sticky afternoon, Yeltsin vows that he will not devalue the ruble and won't even break off his vacation to return to Moscow. Three days later, he does both. Russians view it as a betrayal.

Yeltsin's decisions to let the ruble float down as much as 34% and to put a moratorium on corporate- and bank-debt repayments are desperate measures, steps the U.S. and the International Monetary Fund advised against. If they are followed by real reforms of the tax and banking systems, the program might restore some confidence in the economy and bring investors back. But by itself, the floating ruble will slash the savings of some Russians and increase the cost of living for many, especially those who live in the cities, where more than half the food in the shops is imported. Those are cruel blows to a nation that is already suffering, and could trigger enough political backlash and social unrest to threaten Yeltsin and raise questions about who or what will follow him.

In some ways, Yeltsin is already gone. He still holds office, but his mental and physical staying power is fading. He is out of touch, sometimes simply out of it. On Friday, Aug. 14, he seemed unaware that his chief ministers were preparing the devaluation just as he was assuring the nation it would not happen. He signed off on the move when he got back to town, but when the announcement was finally made, he said nothing. He didn't even seem tempted to fire his Prime Minister--his usual style of crisis leadership--possibly because he would then have to try to get a new one approved by a hostile parliament. "He's clearly getting really close to the wall," says a senior U.S. State Department official. "He's running out of options."

The devaluation had been anticipated, even after the IMF in mid-July put together a $22.6 billion bailout package. The deal didn't reassure investors, however, who continued to pull their money, in dollars, out of Russia. The central bank's efforts to maintain the ruble's value sapped its hard-currency reserves, now down to $17 billion. That is a significant figure: it's all that's left to help keep the ruble from falling through the floor of the new trading range: 9.5 to the dollar. Some currency exchanges on Moscow's streets are already asking 10 for a dollar.