SUNS 4356 Wednesday 20 January 1999

Moscow, Jan 15 (IPS/Sergei Blagov) -- West European markets greeted the sudden fluctuation of the Real, Brazil's currency, with hope, but most analysts here view the Brazilian meltdown as similar to Russia's, with no easy solutions in sight.

They point out the odd similarities between two giants, whose economies seem to be fragile despite their huge potential, although their economic and financial data are totally different.

What both crises have in common is that they developed while governments stuck loyally to International Monetary Fund (IMF) and World Bank recipes for making their economies internationally competitive.
Brazil was burned despite its strict adherence to IMF advice and that will have dire consequences for relations between developing nations and international financial institutions, Vladimir Ryzhkov, deputy chairman of the State Duma - the lower house of Russia's parliament - said Friday.

However, markets in Western Europe reacted with something akin to joy when they learned that Brazil's government had decided not to defend its currency, a decision that resulted in an immediate 15% devaluation.

After suffering losses on Thursday, the stock markets in Paris, London and Frankfurt closed Friday on the rise.

Asian and European ministers of finance met Friday in Germany to evaluate the crisis, while G-7 deputy finance ministers were scheduled to gather in Bonn on Saturday. One growing consensus among them seemed to be that the time had come for international financial markets to be
regulated.

Malaysia's deputy finance minister, Mustapha Mohamed, said Brazil was a "good lesson: we've to manage our economy and make sure we insulate ourselves."

The devaluation may soon help improve Brazil's exports, increase its international reserves and keep the economy growing, but ordinary Brazilians will find that their lives have become tougher, something Russians and Asians now know only too well.

Analysts in Moscow agree that Russia's `Great Leap Forward' into modern capitalism has ended in a spectacular failure. IMF aid schemes have been ineffective, with cash either misused or embezzled. Members of the Russian political elite sound hesitant, expecting possible serious
repercussions for Russia.

There is no doubt that the Brazilian crisis is developing according to Russia's "August scenario" (the Russian currency collapse), said Ryzhkov.
Troubles in Brazil seem likely to affect Russia's prospects for further international lending, as well the country's chances of restructuring its earlier debts, he said.

Almost two-thirds of 1,600 Russian business people and economic experts surveyed Thursday and Friday by RBC (Russian business news agency) believe that the Brazilian crisis reflects a deepening global economic downturn.

The Brazilian crisis will destroy any remnants of investor confidence in emerging markets, said Alexander Shokhin, former deputy prime minister in charge of the economy.

Brazil's fundamentals looked healthier than Russia's - the country has experienced five years of economic recovery, while the Russian economy has been declining since the Soviet collapse in 1991. Russia still depends heavily on sales of commodities -oil, gas and metals- for its revenue, and hefty falls in commodity prices in 1998 severely damaged its earnings.

Brazil's short-term debt looks ominous. Its outstanding debt amounted to some 440 billion US dollars at the end of last year, of which roughly 240 billion was domestic debt, 95 percent of it owed to Brazil-based institutions such as pension funds and insurance companies. Brazil's total external debt was around 200 billion dollars, with public sector liabilities accounting for only half that total.

Russia owes its foreign creditors about 150 billion dollars, for which the government has budgeted only 9.5 billion in 1999, far short of the 17.5 billion required to service the debt.

In August 1998, Russia failed to persuade holders of domestic bonds to roll over the debt and stopped servicing its domestic debt, valued at 40 billion dollars of which about one-third was owed to foreign investors.

Faced with capital flight and the nightmarish Russian-style financial bloodbath, Brazil -like Russia- paid a heavy price to defend its currency. Prior to the Wednesday devaluation, the country was
experiencing a one-billion-dollar-a-day capital outflow.

Brazil's international reserves shrank from 70 billion dollars in July, right before the Russian crisis, to some 30 billion this week.

The Russian Central Bank's gold and foreign exchange reserves now amount to some 11 billion dollars - the lowest level in years and roughly half of pre-crisis levels.

When Russia allowed its currency to float freely in August, the embattled rouble plummeted from 6 per dollar to over 20:1. In Brazil, however, the government expects positive market reactions to generate confidence and stop the downward trend.

The IMF has strongly supported Brazilian President Fernando Henrique Cardoso's economic reform with a $41 billion rescue package, while it refuses to release funds for a $22.6 billion
bailout for Russia as it is unhappy with Moscow's economic policy.

One fundamental difference between the two countries is that Russian prime minister Yevgueni Prymakov took office promising to look into the country's internal needs first, while Cardoso Friday promised the IMF to keep on with the neoliberal plan.