Russia: Meltdown or Stabilization?

CAMBRIDGE: Another crisis, another government. So sputters postcommunist Russia. By restoring Viktor Chernomyrdin as prime minister Boris Yeltsin apparently hopes to stanch the economic bloodletting of the past month. That can’t happen if Mr. Chernomyrdin returns to his stodgy, do-nothing ways.

Only a month ago, in another cliff hanger weekend, Russia received a major IMF and G-7 bailout package; important reforms were promised, a measure of confidence was restored. In no time, Russia was back in the tank; decisive reform did not happen, confidence did not last, overnight investors tried to bail out - the rats left the ship, if you like the unflattering image.

Whether Russia now enters meltdown remains to be seen; clearly it is a prospect. But so is the possibility that the current crisis galvanizes enough consensus to move ahead and do some of the hard work that every country in the end achieves. Its is only a question of time, and of how deeply living standards fall in the interim and how much politics deteriorates toward extremism, just as in the 1920s. In the end every unstable country stabilizes because instability becomes simply unbearable.

Russia’s problem was debt and deficits, not the exchange rate. What starts as a debt problem, however, easily becomes a currency problem when foreign creditors and the locals just as much flee to the safe haven of the dollar. Russia resolved the hemorrhage problem for a moment as the moratorium and capital controls stemmed the outflow of dollars from the central bank. But that is no more than a reprieve. Confidence must now be restored and the only way to accomplish this is to establish stable and sound public finance - the same problem Russia faced and failed to solve for the past decade.