News round-up November 1998


The European Bank for Reconstruction and Development's (EBRD) Transition Report was published on 24 November, and stated that the transition to market economies in Eastern Europe and the former Soviet Union has been slower than any year since the collapse of communism. The countries of Central and Eastern Europe have become more divided, with Hungary and Poland doing well in making structural and institutional reforms, while much of Eastern Europe and Russia are 'significantly under-developed'. Growth in this region continues to slow, with a forecast of three per cent this year as opposed to 3.6 per cent in 1997, although EBRD is optimistic for growth in 1999.

Czech Republic: the Czech Republic's deepening recession led to its long-term foreign currency rating being reduced to A- by the rating agency Standard & Poor's on 5 November. The economy is especially vulnerable due to the lack of progress in restructuring banks and companies and improving the legal environment for business. It also reduced the long-term local currency rating to AA and the short-term local currency rating to A-2, ie, all by one notch.

Estonia: retail sales and real wages for the third quarter both indicate decline, while the Government has revised the Gross Domestic Product (GDP) forecast for 1998 from seven to 4.9 per cent and the growth assumption from six to four per cent.

Latvia: Latvia's trade balance continues to deteriorate, with the Latvian trade deficit an estimated 23 per cent of GDP for the third quarter.

Lithuania: Lithuania's trade balance has also deteriorated further, the Lithuanian deficit standing at 12 per cent. Lithuania has revised its budget, cutting expenditure and revenue in the 1999 draft budget by LTL300 million due to a revision of the GDP growth rate, decreasing from seven to 5.5 per cent. The International Monetary Fund (IMF) has expressed concern about the increasing current account deficit, urging a balanced budget.

Moldova: the Moldovan central bank withdrew from the official interbank currency exchange on 3 November, where it has been losing around $2 million a day propping up the leu. This caused panic as individuals joined businesses in swapping leu for dollars.

Russia: on 31 October, Yevgeny Primakov, the Russian Prime Minister, unveiled the main elements of the Government strategy to deal with the economic crisis, calling for lower tax rates, partial currency controls, support for the 'real' economy, and printing a limited amount of money to pay wage arrears. This was approved of by the Russian government, but has already been rejected by the IMF on the grounds that it did not encourage a market economy. The lack of external funding meant there was a danger of printing extra money to meet the budget deficit. The official economic strategy was released on 17 November, with increasing emphasis on the role of the state in the real economy and the 'socially oriented market economy'.

Russia's draft budget was sent to the Government on 25 November, projecting a deficit of 2.5 per cent of GDP and revenues equal to 12.5 per cent. Revenues are forecast at 485 to 487 million roubles, but the expenditure figure is not yet clear. The Government is considering three economic scenarios with inflation ranging from 30 to 180 per cent, and the budget will be submitted to parliament in early December. However, a survey by the country's official court of auditors suggested that 40 per cent of cash turnover was not declared to the tax authorities, implying between 25 and 40 per cent of Russia's GDP was not declared.

On 27 November, the central bank head Viktor Gerashchenko stated that Russia will not receive IMF funding this year as it considered the budget unrealistic. The IMF has been criticised for its handling of the Russian crisis, and Russia accounts for a fifth of its outstanding loans, so relations with are critical for the credibility of the fund. Indeed, Yevgeny Primakov was quoted on 30 November as describing the officials of the IMF as "young kids who've seen almost nothing of life", suggesting that the Government would print more money if the IMF did not release the $4.3 billion pledged, although acknowledging that this was not desirable (Financial Times 1/12/98). The economy continues to decline, with imports being 48 per cent year on year (yoy) down from September and industrial production 11 per cent yoy down. IMF chief Michael Camdessus is expected in Moscow 1 December to discuss Russia's economic situation with the Government.

There were fears that almost half of Russia's 1,500 banks could be facing closure as the Government does not have enough money to save them when the 90-day moratorium on repaying foreign debts expires 14 November: it is estimated that Russian banks may only be able to honour up to a third of the $6 billion of foreign exchange contracts.

Deutsche Bank and the Russian Ministry of Finance said on 19 November they had reached agreement in principle over voluntary restructuring of GKO treasury bonds and OFZ long-term obligations, subject to finalisation of agreed summary of terms. The Government announced on 20 November that it could not service all its foreign debts, making formal requests for a second round of restructuring talks with the London and Paris clubs of investors. The domestic debt (GKO) market remained frozen. Western banks were still split at the end of the month over the latest offer on GKOs from the Russian government, the $40 billion market frozen on 17 August, with many unhappy with the leadership of Deutsche Bank and Credit Suisse. The current offer means a return of under four cents on the dollar, raising questions for many banks about the provisions made on GKO exposure. At a meeting on 27 November, the split was made worse with disagreement on the status of a wider group of 19 banks, not recognised by the six-bank negotiating committee. On 30 November, the 'Moscow Club', the negotiators representing Russia's domestic creditors outlined a plan allowing a higher rate of redemption for institutional investors forced to place money in GKOs and OFZs than the general terms offered to foreign creditors. Fitch IBCA, the international rating agency, feels that it is probable that Russia will default on the restructured loans, assigning the securities a long-term CC rating and short-term rating of C at the end of the month.

Slovakia: following Vladimir Meciar's defeat, the Slovak central bank was forced to abandon the fixed exchange regime for the Slovak crown, previously held within a fluctuation band of plus/minus seven per cent against a central parity of a currency basket based on the D-Mark and the US dollar. The Slovak crown was devalued by around six per cent on 1 October, trading at around 12.5 per cent below its central parity, falling to Sk36.52 to the dollar during late trading. Moody's, the US credit rating agency, had devalued Slovakia for the second time this year shortly before the announcement, but it was greeted as a wise decision by analysts.


Hungary: a subway project in Budapest was cancelled on 5 November to reduce government expenditure. This will have legal and financial consequences according to Gabor Demszky, Budapest's mayor, as the European Investment Bank (EIB) agreed a £140 million loan to fund the construction.

Russia: two of Russia's largest natural resource groups, Lukoil and Gazprom, signed an outline agreement on 24 November for a strategic partnership covering oil and gas exploration, production and marketing.


Bulgaria: it was announced on 30 November that Bulgaria plans to sell a majority stake in Bulbank, the biggest state bank, by the end of 1999. The Bank Consolidation Company (BCC), responsible for managing state equity in local banks, announced 51 per cent of Bulbank would be owned by private investors within the year.

Hungary: the Government is to sell its 5.4 per cent stake remaining in Matav, the country's foremost telecommunications company, by mid-1999. The chief executive of APV, the state privatisation company announced that this would be followed by minority stakes offered in five of Hungary's six regional electricity distribution companies.

Russia: Yeltsin signed a decree removing the only legal constraint on the sale of 2.5 per cent of Gazprom, the world's largest natural gas producer and the country's biggest company. This could raise about US$1.1 billion for the Government (based on the current price of Gazprom American Depositary Receipts), selling in parts rather than a single stake. An auction was called on 5 November by the Government. Ruhrgas, the German utility, is considered the most likely bidder.


Croatia: Croatia and Bosnia signed an accord aimed at settlement of awkward post-war relations: Bosnia receives the right to use the port of Ploce on the Adriatic, while Croatia has been given free transit through Neum, a strip on the Adriatic coast.

Czech Republic: slow progress towards reforms aimed at EU membership has been criticised, but of the seven chapters of EU rules and regulations examined (of an eventual 37 required for membership), the only transition period requested is in broadcasting, although problems over the country's 300,000 Romanies are envisaged as a possibility.

Estonia: in EU membership negotiations beginning on 10 November, Estonia has submitted 12 chapters, and hopes for transitional arrangements in government statistics, fisheries and special trade agreements with Latvia and Lithuania. It is the only former Soviet Republic invited to the talks.

Prime Minister Mart Siimann's ruling Coalition Party cabinet is likely to be reshuffled following criticism of Siimann's policies by the agriculture and environment ministers. Relations between the cabinet and the parliament have deteriorated after lawmakers rejected the proposed 1999 budget as unrealistic in its forecasting of economic and revenue growth.

Hungary: Hungary presented 11 screening chapters on 10 November (surpassed only by Estonia), requesting a ten-month delay on telecomms liberalisation beyond 1 January 2002, the target date for membership.

Latvia: Latvia's minority Government received the backing of the Social Democratic party on 26 November, providing a solid margin of support. Vilis Kristopans' government gained 59 of 83 votes cast, stating that it would continue to pursue the opposition policies of harmonisation with the EU, privatisation and conservative fiscal policies.

Macedonia: in the general election round of 1 November, the VMRO, the Internal Macedonian Revolutionary Organisation, led by Ljubcho Georgievski, won by 47-8 seats of 120 against 29 for the ex-Socialist Democrats and 12 for the Democratic Alternative (led by Vasil Tupurkovski), VMRO's allies as of earlier this year, to become a coalition. The election campaign concentrated on Macedonia's economic prospects, Mr Tupurkovski pledging to bring in US$1 billion of foreign investment. The Democratic Alternative leader has especially aimed at easing internal racial tensions between Albanians and Slavs.

Poland: Poland has chosen its advisers as part of the EU Phare aid programme, helping to develop a regional development strategy in preparation for membership. The predicted date for EU membership is 1 January 2002, presenting seven chapters for screening on 10 November, although agriculture as an issue is still to be addressed.

Russia: concerns about Yeltsin's health continue, with Yevgeny Primakov, the Russian Prime Minister, standing in for him on foreign trips. He was able to meet the German chancellor Gerhard Schroeder mid-month, who emphasised the need for Russia to meet the economic conditions of the IMF. However, he was taken to hospital with pneumonia on 21 November, and met the Chinese leader Jiang Zemin from his hospital bed a few days later. There are calls for the presidential poll and parliamentary election (due at the end of 1999) to be brought forward, but they were rejected by Gennady Seleznyov, speaker for the lower house.

Yuri Luzhkov, Mayor of Moscow, launched a new centrist political movement called 'Fatherland' mid-month, and announced that he is still debating whether to stand for the presidency as the contest to succeed Yeltsin gathers momentum.

Control of ORT, the main Russian television channel, is being fought for in time for parliamentary and presidential elections for Dec 1999 and summer 2000. Communist Victor Ilyukhin alleges President Boris Yeltsin was given over 26 per cent of ORT shares for three years back in 1994, denied by ORT itself and the Kremlin.

The EU proposed a food aid package worth 400 million ecus (£285 million) on 9 November, formally requested 12 November by Russia. Wolfgang Schussel, Austria's foreign minister and EU president (a rotating position), said the reaction had been favourable. The US agreed to provide $900 million credit line for food and extras in total.

Latvia: Prime Minister designate Vilis Krishtopans rejected former Premier Andris Shkele's People's Party from the coalition government. Places in government have been offered to the centrist group Latvia's Way, the New Party and Fatherland and Freedom, constituting 46 of the 100 seats in parliament. The new government views its main task as improving relations with Russia.

Kazakhstan Akezhan Kashegeldin, the former Prime Minister, has accused Nursultan Nazarbayev, Kazakh President and former Communist party boss of running a corrupt regime and disregarding human rights. He is gaining the support of foreign investors and plans to challenge the President's ambition of running for a third term.

Slovakia: the new premier is Mikulas Dzurinda, following the defeat of Vladimir Meciar in September's election. The new Government hopes to re-establish the foreign relations dropped under Meciar's regime, hoping for acceptance by the Organisation for Economic and Cooperation and Development (OECD) and put on the fast track to join the EU next year, although it is too late to join the North Atlantic Treaty Organisation (NATO) along with Czech Republic, Hungary and Poland in the first wave. Slovakia hopes for foreign investment to help the economy after the political change. The banking sector is one of world's most fragile according to Standard & Poor because of non-payment of debt.

Slovenia: Slovenia presented seven of the 37 chapters of EU legislation on 10 November. The reforms made for EU membership of phasing out state aid to uncompetitive industries has been criticised as slow, but the main problems for this stage of the membership process is audio-visual policy and potentially telecommunications.

Serbia: leaders of the Serb minority accused Slobodan Milosevic mid-month of betrayal by negotiating a US-sponsored peace plan in Kosovo giving the ethnic Albanian majority control of Serbian provinces (Serbs made up ten per cent of Kosovo's two million population, although the numbers are now dwindling). This peace plan was published in part on 18 November, and partly meets ethnic Albanian leaders' demands removing Serbia's authority and granting them substantial authority within the Yugoslav federation. It has been rejected by the Socialist government in Belgrade, prompting fears of a resumption of war.

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