Foreign Banks and Investors Growl at the Bear

During the seven years since Soviet rule, foreign investors who got seriously involved in Russia were willing to brave corruption, bodyguards, blackmail, red tape, and bleak sunless winters.

But now many are losing patience with events that really hit their bottom line: Russia's default on debt and the collapse of the ruble.

The economic crisis has provoked extreme exasperation, particularly among the American businesses. The International Monetary Fund (IMF) is holding back promised loans of billions of dollars. And foreign bankers are threatening to sue the state and Russian banks for discriminatory action.

Russia, they say, runs the risk of financial isolation if its new government doesn't move quickly to restore confidence. "This is a systematic failure, not a blip," says Scott Blacklin, head of the normally optimistic American Chamber of Commerce in Moscow. "There is a belief in Russia that foreign investors will be here no matter what. That is wrong," he says. "This new government institutionally has no credibility."

Since his swearing-in Sept. 12 ended a three-week power vacuum, Prime Minister Yevgeny Primakov has tried hard to reassure foreign investors that they will be treated fairly.

But Mr. Primakov is hostage to the debacle of his predecessors, who spent billions of dollars defending a ruble that eventually collapsed from 6.3 rubles to the dollar in mid-August to about 14 today. In just a few weeks last month, the banking system unraveled, prices soared, and thousands of jobs evaporated.

Aside from the fact that Primakov is having trouble attracting capable people to join his Cabinet and has only a vague economic program, he has inherited the anger of Western lenders who want proof that Russia will honor its debts. That effort suffered a blow on Friday when Deputy Prime Minister Alexander Shokhin, a centrist who was leading negotiations with Western creditors, quit to protest what he claimed was the government's "leftist agenda."

Primakov told reporters Sept. 18 that Russia was ready to fulfill all of its commitments to nonresident investors and creditors. But he added: "At the same time we expect our partners to understand the situation, and we hope that they will implement all earlier agreed programs."

The premier was referring especially to the IMF, which has doled out billions of dollars to Russia since 1992. It promised a further $22.6 billion in July, but is holding on to most of the money for now after an initial $4.8 billion was squandered.

The IMF has grown irritated with empty promises from Moscow to cut the budget deficit, improve tax collection, and fight corruption. International bankers have also lost their infatuation with Russia after losing a record $100 billion.

Primakov promised that foreign investors would be treated fairly as Russia revises a plan to restructure $40 billion in domestic treasury bill debt known as GKOs. But foreigners, who hold $16 billion of that amount, say they have not been given the opportunity Russian banks have to redeem their assets and swap useless GKOs into new short-term bonds with real market value. The investors are also alarmed by the Central Bank's recent decision to print rubles, making hyperinflation inevitable.

Not just investors in the financial sector are suffering. Western multinationals involved in production and distribution of goods have been badly hit by falling sales, frozen bank accounts, and non-convertible rubles.

Among those cutting production or staff are General Motors, US aircraft enginemakers Pratt & Whitney, and British confectionery group Cadbury Schweppes.

Mr. Blacklin of the American Chamber of Commerce says US companies have lost at least $465 million.

"It's like a neutron bomb," he says. "Not one company has been untouched."