RUSSIA - The Economic Base

The Russian economy is once again in dire straits. By 1996, the country had managed to overcome some of its structural difficulties by bringing inflation under control, stabilising the rouble and reducing the budget deficit. This was done with the help of supporting finance provided by the IMF. But all this now stands at risk, amid a grave financial crisis.

The possibility of a rouble devaluation threatens to undermine Moscow's main achievement since the collapse of the Soviet Union, i.e. the stabilisation of

the currency. It is to stave off this possibility that the IMF agreed to a $22.6 bn support package for the country on July 20 (see the financial situation in OMT of this week).

Most observers agree that the Russian economy is going to get worse before it gets better. They note that even if the government manages to avoid devaluation, it would do so at a price in terms of social stability, because of the tough reforms required by the IMF. Topping these is the issue of tax collection, mainly from the big energy sector companies, but at the root of this problem lies the question of non-payment of utility bills by end-users. End-users, for their part, cannot pay because of unpaid wages. This problem has been gotten worse over the past year in both the public and private sectors, with the latter bearing a heavier responsibility for unpaid wages and salaries.

Another issue is the tight fiscal policy envisaged by the government, which would leave even less funds available to pay off workers in key infrastructure sectors like coal. The austerity plan proposed by the government has been strongly criticised by opposition figures and powerful oil company chiefs. Opposition figures in parliament, bureaucrats, regional politicians and large business groups are likely to oppose the implementation of tax reforms proposed in June by Premier Kiriyenko. These include a doubling of taxes on apartment houses, quadrupling of other land taxes, a 3% duty on imported goods and an extension of 10% VAT on a range of products.

Yet the possibility exists for the situation to improve, even in the short term, i.e. within the next year. The government is currently running a primary budget surplus. If this can be sustained, it should be able to reduce the size of the treasury bill market. This in turn should minimise the fears of devaluation and a lowering of interest rates. Former premier Yegor Gaidar, who is an influential figure in the background, says interest rates could fall to 15-25% by the end of 1998 from 130% in June.

Much depends on how the reforms envisaged by Kiriyenko are implemented. Both tax collection and spending cuts would have to be carried out in a effective manner. As one example on the spending side, the vast new Russian bureaucracy - bigger than the former Soviet bureaucracy - would have to be reduced in size. The government's aim is to slash the number of civil servants by 200,000. If the planned tight fiscal policy is implemented, Russia could have a primary budget surplus of about 3% of GDP in 1999.