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Ruble Falls As Investors Bail

The Russian ruble suffered its largest one-day fall in almost four years Tuesday as investors scrambled to buy foreign currency amid continued uncertainty about government economic policy.

After the currency, fixed income and stock markets closed, the government finally announced the details of its debt-restructuring program, an announcement that had been delayed twice since the government defaulted on its treasury bond payments last week.

The terms of the restructuring will require investors to switch into much longer-term paper denominated either in rubles or dollars.

Investors switching into dollars will have to accept a much lower interest rate. In return for their ruble-denominated treasury certificates, investors would receive a dollar-denominated bond maturing in 2006 with a 5 percent coupon.

Investors who elect to stay in rubles will get 3- to 5-year bonds, with a much higher interest rate. For example, the payout would be 30 percent annually in 1998, 1999, 2000 and 2001. The next year the payout would decline to 25 percent, and in 2003 to 20 percent.

The terms were seen as more favorable than many had feared.

Trading on the Moscow Interbank Currency Exchange was halted twice during the day as circuit breakers kicked in and the central bank had to intervene heavily to add liquidity, a MICEX spokesman said. The ruble closed down 10 percent at 7.86 to the dollar. On Monday, the exchange rate was 7.14 rubles to the dollar, down from Friday's 6.99 rubles to the dollar.

Any remaining investor confidence has been severely undermined by the government's shortage of hard-currency reserves and by the economic crisis that snowballed last week with the devaluation of the ruble and the dismissal of the government Sunday.

"People do not want rubles. It's just that simple," said Dirk Damrau, the head of research at Moscow's MFK Renaissance Bank. "There is no reason to be calm, to be honest."

The Russian central bank has been selling dollars steadily in recent sessions in an effort to slow the fall of the ruble. By midday Tuesday, it had already spent about $340 million to defend the ruble, traders said.

On Aug. 17, the central bank liberalized its trading corridor for the ruble, lowering the Russian currency's floor from 6.9 rubles per dollar to 9 rubles per dollar. With the country's reserves depleted from previous attempts to support the currency, Damrau said, the central bank must be having second thoughts about significant intervention in support of the ruble.

"If the government chooses to maintain the floating exchange rate, it will be tested much more quickly than we thought," Damrau said in a televised interview.

Tuesday's drop was the sharpest since October 1994, when the ruble lost 30 percent of its value against the dollar in a trading session in which the rate was set freely by the market. The ruble's value has tumbled 19.7 percent since Aug. 17.

Stabilization of the national crrency and the inflation rate were the two hallmarks of Russia's economic reform program. With President Boris Yeltsin firing his government Sunday for the second time this year, those accomplishments appear as elusive as ever.

One trader predicted further dips this week. "We could see 9 or 9.5 [rubles to the dollar] by Thursday," the trader said. "No one is buying rubles except the central bank, and even it does not want to do it on a big scale.

"Investors want some specifics from [Viktor] Chernomyrdin," he said of Yeltsin's recycled choice to head the government. "We want to know how much we are going to lose on our GKO [government bond] investments."

Russian citizens spent the day lining up at banks, frantic to get their money out of financial institutions and into safer havens: their own two hands.

"I've got $600 in a savings account. They won't give it to me in dollars or rubles. It's not that much money, but I don't want to lose it when the system collapses," said Margarita Golubokova, 33.

Sensing the growing seriousness of the situation, a commission including representatives of the government and both chambers of parliament began work on a draft program of economic and social policies, ITAR-Tass reported.

The agency also reported that the terms of the planned treasury bill debt- restructuring program would be the same for both domestic and foreign investors. Chernomyrdin is said to favor the plan, according to ITAR-Tass, but no details had been released by the end of the trading day in Moscow.

Written By Margaret Coker, CBS MarketWatch Moscow Correspondent