RUBLE CAUSES FINANCIAL TEMBLOR.

Byline: Deborah Adamson Daily News Staff Writer

First Asia, now Russia.

The notion that America's economic welfare is tied to nations around the world was sharply brought into focus Thursday, when the U.S. stock markets plunged in reaction to the worsening economic crisis half a world away, in Russia.

The Dow Jones industrial average dropped 357.36 points, or 4.2 percent, to 8,165.99, the biggest one-day point loss since Oct. 27. The Dow was last in 8,100 territory in February. The Standard & Poor's 500 Index dropped 3.8 percent, or 41.68, to 1,042.51. The Nasdaq Composite Index dived 81.72, or 4.6 percent, to 1,686.41.

The repercussions of Russia's financial woes have been heard all over the globe:

In Germany, Japan and the United States, where major banks have lent money to Russia that now may not be repaid.

In China and Hong Kong, where the probability of devaluation there looms closer.

In Mexico and the rest of Latin America, where their status as emerging markets makes them a nervous investment for investors worldwide.

And, finally, in the investment portfolios and pension savings of millions of Americans, which have wilted under the heat of the global commotion.

``Russia is a systematic problem that will not be going away. It will be there for years,'' said Don Wellenreiter, president of Defined Risk Asset Management Inc., a commodity trading advisory firm in Newbury Park. ``The ripple effect is starting to hit the world markets and it will be around for quite a while.''

Economists say this ripple actually started nine years ago, when the Berlin Wall fell. Countries that were run by communists less than a decade ago are now learning the nuances of market-driven economies and, in Russia at least, having a hard time with it.

``The (Russian) government doesn't have a clue,'' said Michael Bernstam, an expert on the Russian economy at the Hoover Institution think tank of Stanford University. ``This is a house of cards and any wind could blow it down.''

Many problems

Bernstam said Russia is beset by problems: It is having trouble switching from an economy controlled by the government to a market-driven economy, similar to the one in the United States; its major industries continue to rely on government subsidies; private citizens and companies that control Russia's natural resources are not paying their taxes in part because of government inefficiency at collection; and it relies on foreign money for even basic expenses like wages.

Foreign money that has poured into Russia comes from many sources, and includes the investments of U.S. mutual, hedge and pension funds as well as loans from German, U.S. and Japanese bankers.

But last fall's economic crisis in Asia affected Russia's ability to attract foreign funds. The Asian nations that had their own currency crises last fall increased their interest rates to help prop up the value of their money. That meant that the rates they would pay on bonds or loans rose as well. Russia, in turn, had to raise its rates to compete for the world's investors.

As interest rates rose, bond prices declined. Unfortunately, many Russian banks had used the country's bonds as collateral for their borrowings. When bond prices dropped, so did the value of their collateral, Bernstam said.

As a result, international lenders made what are known as margin calls. That is, they told Russian bankers to put up more collateral or repay the loan. Russian banks defaulted.

It didn't help that as the Asian crisis hit, world oil prices weakened. Russia relies heavily on oil exports to bring more money into the country. Less income from oil has made it difficult for Russia to pay for imports like food.

The International Monetary Fund and World Bank - a coalition of countries that assist financially troubled nations - led a group of institutional lenders that offered a $22 billion relief package to Russia, an IMF spokesman said. About $4.8 billion was disbursed immediately to Russia but it was depleted quickly, used to repay some loans, pay the people's back wages and defend the ruble.

On Aug. 17, the Russian government defaulted on its bonds and allowed its currency - the ruble - to be devalued. That means it takes more rubles to exchange for one U.S. dollar than it did last month, increasing the cost of imported goods for Russians.

Global jitters 

The devaluation triggered a round of global jitters that culminated with Thursday's sell-off on Wall Street.

With the value of the ruble weakening, people exchanged their money for U.S. dollars, a stable currency. With greater demand, the value of the dollar rose. But in doing so, it made other nations' currencies weaker in comparison.

Countries that don't want their currency devalued will be forced to defend it by raising their U.S. dollar reserves, if they can afford it, Bernstam said.

If not, they will be pressured to raise interest rates to shrink the money supply and boost the currency's value. Higher rates make it more difficult for businesses to grow by borrowing, so the economy of a nation that raises rates could slow down.

Russia's woes flow to Mexico and Latin America as well. If Russia decides to dump a lot of its oil in the market to raise money, for instance, it would depress prices further and hurt oil exports of nations like Venezuela, Mexico and China, Wellenreiter said.

Meanwhile, since Japan and its banks have lent money to Russia that might not be paid back or might be repaid at a big discount, Tokyo will be pressured to devalue the yen. In turn, that will put pressure on Hong Kong and China to devalue their currency so their products will be competitively priced abroad, Wellenreiter said.

But that would erode the buying power of citizens and companies in those countries, hurting the U.S. businesses that sell products and services to them.

All this could explain why the international investors - many of whom are the money managers of U.S. mutual, hedge and pension funds - who have left the Russian and other emerging markets in droves haven't invested much of that money in the U.S. stock markets: Many believe that U.S. corporate earnings will take a hit because of the snowballing problems abroad.

Several companies already have disclosed losses related to Russia: Credit Suisse First Boston, billionaire George Soros' Quantum Fund, Bankers Trust, BankAmerica, Chase Manhattan and Citicorp, according to MSNBC. Coca-Cola fell $3.375 to $75.8125 Thursday after a downgrade by an analyst who said the worldwide soft-drink firm will be hurt by a broad-based global economic crisis.

That's when the Russian crisis hits home to American investors everywhere, as they see the value of their investment holdings drop from market turmoil. Coca-Cola officials haven't said they expect overseas sales to slow down, but investors already are betting that they will by selling off its shares.

``It's the fear of the unknown as it spreads,'' Wellenreiter said.