Moscow finds deep pockets for war

The first budget surplus in nine years helps fund a billion-dollar

Teachers in provincial Russia go unpaid for months. Roads are crumbling across the vast land for lack of maintenance funds. Meanwhile, Western creditors are dragging their heels on giving Moscow more loans.

So where and how is Russia paying for its three-month war to crush Muslim separatists in Chechnya? And can it afford to continue the fight, which has already cost an estimated $1.5 billion?

The answer is yes, at least for the time being.

Unexpectedly high oil-export revenues, diversion of money earmarked for social services, and a reviving economy have put in good stead a military that a year ago told soldiers to hunt and gather their own meals because it could not feed them.

For the first time in nine years, Russia has a budget surplus. The financial coffers are so full and the political advantages of the popular war so compelling during this election time - voters go to the polls Dec. 19 - that the government appears ready to pay for the war no matter what the price. (see Chechnya, page 2.)

"Russia will find the money somewhere," says Digby Waller, an economist at the International Institute for Strategic Studies (IISS), a military research group in London.

Mr. Waller estimates that if the war lasts another three months, the total cost to Moscow will be $1.8 billion to $3.6 billion.

Economic figures paint a picture of relative rebound from the panic days of financial crash in August and September last year. Then the ruble lost 75 percent of its value, and the country defaulted on some of its loans.

The shelves in stores then emptied by panicked hoarders are full again. No longer do crowds gather around foreign exchange booths watching the ruble sink. Banks have so much cash, they do not know where to invest.

To be sure, though, endemic problems remain. A vast amount of Russia's 147 million people eke out a miserable subsistence living off home-grown chickens and cucumbers. Millions of Russians work months without pay and rely on barter.

But the ruble has stabilized. Its fall from six to the dollar before the crash to the mid-20s has had a positive effect on the economy. The high costs of imports means that even luxury restaurants and stores favored by expatriates are increasingly using Russian foodstuffs.

Industrial production, which slipped some 15 percent after last year's crisis, has snapped back about 20 percent. Some experts expect Russia's gross domestic product, or its total domestic output of goods and services, to grow up to a real 2 percent this year after contracting last year.

Because imports of foreign goods has nearly halved, and prices of oil - Russia's main export - have doubled, Russian now has a surplus in its trade account of about $3 billion a month, and tax revenue is up.

But experts expect Russians to ship about $20 billion abroad this year for safety reasons.

Even the war is helping the economy, says Mikhail Delyagin, director of the Institute of Global Issues, by reviving the military-industrial complex. Russia in recent months has discussed a flurry of weapons export deals.

"The war is positive in that it is creating more local demand and arms exports," he says.

One of the biggest beneficiaries of Russia's overall economic growth is the Ministry of Defense. The Duma, lower house of parliament, has approved extra expenses of $2 billion for 1999, of which most go to the military. In October, the Ministry of Finance said that even after war expenses, there would still be enough money left to fulfill current obligations due to the International Monetary Fund.

If that is true - and the government is notorious for lying about its finances particularly at elections time, political analysts note - that is good news. Displeasure with Russia's assault on Chechnya is growing in the West and the IMF could become a major tool to exercise political pressure on Moscow to stop the war. In what Moscow sees as a political decision, the IMF on Monday decided to postpone granting $640 million to Moscow, as part of an earlier agreed upon $4.5 billion package. The IMF said it was awaiting progress on a number of structural reforms in Russia.

Although officials will not state so openly, the IMF is reluctant to be seen as bankrolling a war that has displaced around a quarter of a million people and killed an uncertain number of civilians as well as rebels.

Withholding IMF aid has wider implications, as the Fund's loans often serve as a green light for further loans from the World Bank and Japan and for ongoing talks on rescheduling Soviet-era debt.

France, Britain, and Italy have threatened economic sanctions against Russia in response to Moscow's ultimatum to Chechens to leave their capital or die. US Republican presidential contenders George W. Bush and Sen. John McCain have called for cutting off US aid to Russia while the Chechnya conflict continues.

But this may be a risk the government is willing to take.

Popularity ratings are soaring for Prime Minister Vladimir Putin for his tough stance on Chechnya. With Dec. 19 parliamentary elections and a presidential poll in June, the Kremlin may be wiling to risk international isolation in order to woo voters.

IMF money or not, the Kremlin is counting on tax income and oil prices remaining high. If the war drags on and revenue dries up, the government will be hard pressed to provide for its 100,000 soldiers involved in the campaign.

The last war against Chechnya, in 1994-1996, cost from $1.3 billion to $ 5.5 billion according to an array of estimates. The strain on the country's budget helped push Russia further into a prolonged recession.

(c) Copyright 1999. The Christian Science Publishing Society

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