The eyes of the world will be on Russia this weekend to see whether the rouble is devalued in response to the latest financial crisis to assail President Yeltsin's administration. As the White House spokesman, Mr Mike McCurry, put it this week in urging the Russians to speed up implementation of their economic reform programme, the rest of the world has a big stake in the outcome. Presidents Clinton and Yeltsin spoke about it yesterday, but it is not clear that the US agrees with the proposal to devalue, which was firmly rejected by the Russian leader. The contradictory pressures and interests at work leave precious little time for him and his colleagues to work out a coherent response.
It is always dangerous to assume financial markets work rationally and logically, but equally so to disregard the signals thrown up by such feverish behaviour. Close observers of the Russian markets are saying they are in danger of terminal meltdown, the phrase used by the financier George Soros this week to describe their condition. This is partly because of a liquidity crisis suffered by Russia's banking system, partly lack of confidence in the ability to deliver on the reforms undertaken only last month in return for an IMF loan of 22.6 billion dollars - and partly fallout from the Asian crisis on the world economy, of which Russia is unfortunate to become the latest weak link.
Mr Soros made the strong point that the action necessary to deal with the banking crisis - injecting liquidity - is diametrically opposed to that agreed with the IMF to deal with the budget - a tight monetary and fiscal policy. His solution, a 15-25 per cent devaluation of the rouble and the introduction of a currency board to stabilise and police the new exchange rate, has been rejected by Russia's leaders. They say it would not address the needs identified last month when the IMF loan was negotiated, including increasing tax revenues and cutting expenditure. It would also increase social conflict and inflation, the containment of which is regarded as Mr Yeltsin's most positive domestic achievement, despite the glaring inequalities, injustices and corruption that have marked the transition to a market economy. One official said devaluation would push back the reform programme for 10 years. Food prices would be increased and rouble savings affected. The most malign scenarios foresee an economic and political collapse, "an Indonesia with nukes". Avoiding such an outcome must clearly be a most pressing priority for the entire international community as well as for President Yeltsin. Fortunately, there was little sign yesterday of the kind of popular panic that might lead to a run on the Russian banks. There is still some time to reach a considered resolution of the crisis if the Duma agrees to reconvene next week in order to implement the IMF reform programme more rapidly. But Mr Yeltsin has a job on his hands to convince the communist opposition to co-operate. And his record in office, in a year when he has sacked the government and failed to implement reforms at the pace required, do little to engender confidence.
The more pessimistic international observers see this latest Russian crisis as part of a wider scenario which includes Japan's failure to implement its economic reforms, dangers that this could lead to another round of Asian devaluations led by the Chinese and knock-on effects to emerging markets in central and eastern Europe, Brazil, Mexico and South Africa. At that stage the world economy would face a substantial reverse in its fortunes. All the more reason to pay closer attention to Russia in coming days.