Russia's 1995 Budget Looks Good, but Now Comes the Hard Part

IF good intentions were all that guided economic policy in Russia, the country would be well on its way to prosperity, judging by Prime Minister Viktor Chernomyrdin's draft 1995 budget.

The document he presented last week to the State Duma (parliament) is a paragon of financial virtue, intoning the verities of Western-style reform, complete with fiscal restraint, reliance on the market, and promises not to fudge the figures.

But as Duma deputies started to debate the draft budget this week, and as powerful lobbying groups such as the Army, farmers, and heavy industry worked to loosen the planned credit restrictions, the government had its work cut out for itself to stay on course.

``I think that now we will have a long period of work with the Duma to approve this budget,'' said Acting Finance Minister Andrei Vavilov, after Mr. Chernomyrdin's speech.

Reformist Duma member Alexander Pochinok, vice chairman of parliament's budget committee, was more openly worried. ``The draft budget and the adopted budget are always poles apart,'' he said. ``Changes may be introduced, ... but the most undesirable avenue would be for the government to seek a total compromise with the lobbying groups.''

Chernomyrdin presented his budget as one ``on which the entire further development of our country will depend.'' ``We need to make a decisive breakthrough now,'' he argued. ``The pace of reform ... has lagged behind economic needs.''

The government's main target, he said, was inflation, which threatens to undermine the reforms to date. ``As inflation goes, so our life goes,'' Chernomyrdin told parliament, setting a target of 1.5 percent to 2 percent monthly inflation by the end of next year, and a 30 percent total rate for 1995. Inflation was capped at about 4 percent a month until September, when it nearly hit 8 percent. It is expected to breach double figures in October.

The key to controlling inflation, Russian government officials say, is an unprecedented decision not to cover the budget deficit with unsecured Central Bank loans, an easy resort in the past.

According to the new budget, next year the government will finance its 72 trillion ruble ($24 billion) deficit - equivalent to 7.8 percent of gross domestic product - by attracting foreign loans and issuing government securities. Moscow is banking on receiving about $8 billion in standby and other loans from the International Monetary Fund (IMF) and World Bank, and is hoping for a special $6 billion IMF loan to help stabilize the ruble.

But these figures have provoked skepticism outside the government. ``I don't think all that money will be available, and I certainly don't think it would be good for Russia,'' John Odling-Smee, head of the IMF department that deals with Russia, warned at a recent seminar here.

``It is unbelievable that a country that is ... unable to pay off its old debts is putting more than $10 billion of unreceived and uncertain credits into the budget in advance,'' former Finance Minister Boris Fyodorov, wrote in the daily Izvestia this week. ``For this reason alone, the budget is phony.''

Chernomyrdin said he was optimistic that selling government bonds - including $2 billion worth in the West, according to Finance Ministry officials - could cover as much as one-half of the projected deficit. But critics question the plan's long-term implications.

``I do not envy a government that has to repay those issues in 1996,'' says Sergei Glazyev, chairman of the Duma's powerful economic policy committee.

The government also says it plans to be firm in capping spending, especially on sectors such as coal mining, farming, defense, and heavy industry, which have traditionally survived on subsidies.

Already, the new agriculture minister, Alexander Nazarchuk, opposes the budget, arguing it is insufficiently generous to the farm sector. The Army and other heavyweights are also likely to start applying pressure soon, as parliamentary debate gets down to details.

Fewer subsidies will inevitably mean more bankruptcies, higher unemployment, and the risk of social unrest, officials acknowledge. But they insist that Russia is over the hump in its reform efforts. ``The crisis has reached its lowest point,'' argues Mr. Pochinok, a member of the pro-reform ``Russia's Choice'' party, which backs President Boris Yeltsin. ``It is pointless at present to continue to pursue our moderately austere financial policy. What we need now is to put a final stop to inflation.''

Chernomyrdin called 1995 the year of ``financial stabilization,'' 1996 a year of ``emergence from depression,'' and 1997 a year of ``vigorous economic growth.''

``We cannot move forward,'' he added, ``while looking backwards or sideways.''

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