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Russian Investors Await Fallout

Lacking much of a government, uncertainty ruled over Russia Monday, leaving investors anxiously wondering whether the nation's latest shake-up would remedy its financial disarray.

President Boris Yeltsin sought to explain why his replacement choice of ex-premier Viktor Chernomyrdin would bring the government the steadiness he couldn't get from the 4-month-old government of ousted Prime Minister Sergei Kiriyenko.

"The main priority is not to allow any steps backwards, to maintain stability," Yeltsin said in an address on national TV. "Today we need people known as heavyweights. I consider the experience and weight of Chernomyrdin essential."

On the news, the benchmark Russian Trading System index soared 5.6 percent to 86.34 but only a relatively light 4 million shares changed hands. Gazprom, the world's largest natural gas company that Chernomyrdin used to head, led the gainers, jumping 20 percent.

The State Duma, Russia's opposition-controlled lower house of parliament, which must approve the choice, reacted with hostility to the decision, as it has after most of Yeltsin's political decisions over the last two years.

"It's simply comical," said Vladimir Lukin, a leader of the liberal Yabloko bloc in parliament. The ITAR-Tass news agency quoted him as saying the decision "reveals the deep confusion and uncertainty at the center of executive power.

By the end of trading in Moscow, there was no word from the Kremlin about the debt-restructuring deal that was due to be announced Monday. A spokesman for Boris Feodorov, the official charged with overseeing the plan, said Chernomyrdin would have to OK a deal before it was released.

Last week, Kiriyenko announced a mandatory restructuring of $40 billion in domestic debt after the government ran out of cash to prop up the ruble amid a burgeoning financial crisis. The debt swap was to have been announced Wednesday, but foreign investors said it was delayed after they cried foul over the terms for foreign investors in the original plan. The outstanding bond issues to be swapped for longer-term paper total $40 billion in value. More than $11 billion of the Treasurys are held by foreign investors.

It isn't clear whether the government will be offering investors face value or market value for their notes. However, investors expect the government to offer them three swap plans.

One plan would offer five-year, U.S. dollar-denominated paper paying 6 percent, while another plan would offer three-year, ruble-denominated debt with a much higher interest rate in excess of 50 percent. A last option would allow investors to keep their existing Treasurys and cash them in after two years for paper covertible into dollars.

Yeltsin's selection of Chernomyrdin, just days after the opposition-controlled Duma called for Kiriyenko's resignation, may placate the members of parliament's lower house, analysts said. Chernomyrdin, 60, served as Yeltsin's prime minister fomore than five years until the president abruptly sacked him in March saying he wasn't pushing market reforms agressively enough. Western analysts accused him of dragging his feet on basic structural reforms like balancing the budget and overhauling the tax code.

"My assumption is that Russia's going into a tailspin like Indonesia and Bulgaria," said Anders Aslund, a senior associate at the Carnegie Endowment in Washington who resigned as a Yeltsin adviser in 1994 because of his unhappiness with Chernomyrdin. "The best you can say about his term as prime minister is that when he was weak, some reforms were accomplished."

In his televised address, Yeltsin praised Chernomyrdin's honesty and reliability. "I believe these qualities will be a decisive argument in the presidential election."

Duma Speaker Gennady Seleznyov said he welcomed Yeltsin's decision to fire Kiriyenko, whose government was "not capable of working efficiently," the Interfax news agency reported.

However, he criticized the reappointment of Chernomyrdin. "This endeavor is unlikely to succeed, since Kiriyenko's government, which survived just over 100 days, continued what the former cabinet was doing," Seleznyov was quoted as saying.

Despite a plea by Yeltsin that the financial situation demanded immediate action on Chernomyrdin's nomination, Duma leaders said they do not plan to meet this week to consider the question. The Duma's deadline to confirm or reject Yeltsin's choice is late next Monday, the same day President Bill Clinton is due to arrive in Moscow for summit talks with Yeltsin.

Seleznyov told reporters after the meeting of the council that the Communist-dominated chamber wanted Chernomyrdin to present his program and the line-up of the government first - although there is no such requirement in Russian legislation.

"The candidate should first prepare a program and agree it in the Duma," Seleznyov said. "Then the candidate can go with this agreed program to the president and if the latter is happy with it he can formally propose the candidate to the Duma."

Still unclear is the future of most of the former Cabinet, which had been praised by Western investors as the most reform-minded, energetic, capable team Russia has had since the break-up of the Soviet Union.

Russian television reported that Chernomyrdin would name Kiriyenko and tax chief Boris Feodorov as deputy prime ministers. Former deputy prime minister Boris Nemtsov would not participate in the new government, television reports quoted a Nemtsov spokesman as saying.

Written By Margaret Coker, CBS MarketWatch Moscow Correspondent