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Beginning in late October, the program hasbeen growing even more moderate and less specific. More exactly, it has beentaking in a host of unrelated plans in the social and manufacturing spheres,tax policy, and interbudgetary relations. As previously, however, it betraysreluctance to give solid substance to the economic policy. Analysts pokingaround for the reasons of the crisis were now talking less about the fallaciouspolicy of yesteryear and more about the implications of the budgetary crisisand ways to pull out of it. Maslyukov, you won’t believe it, went on record (in astatement to the delegates of the Davos Forum meeting in Moscow on December4th) that the new government was going to accomplish what its predecessorswanted, but were unable to.

The core idea suddenly vanished from theprogram. No hopes were now placed on money issue. Rather, it exudes realizationof the dangers haunting the economy awash with banknotes, as is evidenced bythe recognition of the critical gap between the necessity of a larger moneysupply and the possibility of inflation-free money printing, and theacknowledgement of the danger of hyperinflation. Hopes for strong and wisegovernment have eventually been reduced to a ritualistic chant about the needto fortify the nationhood concept as a major source of improved economicperformance. Ultimately, the Program was renamed, on the premier’s cue, to a document with anelusive title Apropos of Measures, etc., as though to emphasize that themeasures it contains have a loose, if any, relation to one another.

The microeconomic growth conception builtinto all the programs surveyed here is a very specific thing. In the firstplace, it gives negligible attention to the protection of private property,which is accorded only scant attention in most of the documents. It issymptomatic that, for example, the program version unveiled on August 27totally avoids the concepts of private property and private, while 13 ofthe 14 instances where mention is made of property reference is made to publicproperty, in its various forms. Privatization did not merit attention at all.Here’s a governmentthat tends to parade its preference for direct over portfolioinvestments.

It would be unfair to reduce thegovernment’sprogram-mongering to a hodgepodge of finished or draft program products.Another two documents, the tax reform conception and the draft 1999 federalbudget, certainly did and do play a bona fideprogram-setting role. They warrant a brief summary,which comes a few passages below.

The bottom line at the end of 1998 was thatthe government had, after months of program-mongering and pondering over theproblems confronting the country and ways to resolve them, maneuvered itselfinto a corner. It had recognized the perils of the prescriptions borrowed fromthe cookbooks of the economic policy of populism, yet it failed to come upwith a worthy replacement for the initial (populist, print press reliant)action program. The cabinet was reluctant, and the premier lacked the will, toaccept the unpalatable fact of only two alternatives – either rigid inflationismor rigid stabilization – open to them and, therefore, the inevitability of a choice to bemade out of these two options.

The unwillingness to clinch the choice hasdriven Primakov to opt for evading critical decisions, putting them off for abetter time. The political mandate conferred on the premier and the backing hegot from the lawmakers and a large segment of the public justified his tactic.The speeding economic processes were leaving him ever less room for dodgingmovements. The government’s practical moves, no matter how earthly and ideologically barren,was not politically neutral, by any measure, and were pushing it to the edge ofthe cliff, where it was to take the plunge.

1.3.3. Practical Economic Policy inOutline

The government’s day-to-day policy consists ofpractical moves in economics and a stream of enactments churned out by thegovernment. Accordingly, the cabinet members’ assorted actions can be arrangedinto two groups. One group gathers measures, hand-me-downs from the Sovieteconomic establishment, to strike a compromise between the leading Soviet-eragroups of interests, the agrarian and engineering lobbies. The other groupunites moves to dismantle the brickwork put up by the preceding cabinets,particularly, the Kiriyenko government, mostly in taxes and budget managementand attempts to steer financial flows. The government rescinded legislationthat ran against the policy of balancing the main lobbies against one another,and embraced whatever did them a favor. The powerful lobbies were coddled byendorsement of previous cabinet decisions to cut taxes, allow output to be soldbelow cost, and a series of other steps that were certainly portrayed asmeasures to support the real economic sector.

Budgetary Policy

An analysis of the government’s budgetary policy spotlights twoessentially different approaches and, therefore, two groups of decisions thathad entirely different effects on the prospects of the country’s economic development. First,decisions that eroded the revenue base of the budget, above all, thoseaffecting the tax policy. And second, preparation of the 1999 budget based onthe principles of minimum money issue to finance the deficit. The conflictbetween these two approaches is largely explained by the evolution of thecabinet’smacroeconomic views from inflationism in September and October to a realizationof the need to stiffen the budgetary policy, in November and December. Theconflict has a self-evident practical basis – the cabinet’s desire, and thepremier’s privateyearning, to avoid awkward moves and secure, as a reward, a maximum possiblepolitical backing for their decisions, however unpopular. Indeed, politicalsupport is critical for Primakov as a key factor behind the decisions he makesin economics.

The government’s decisions and actions,therefore, fall into two groups and, accordingly, into two phases in his actualpractices. First, the populist decisions of the first three months. And second,preparation of a cautious budget for 1999, the publication and adoption ofwhich is, in fact, a stand-alone factor in the evolution of the economicsituation. It is expected that a third phase, if and when it comes, willdemonstrate the government’s guts to translate their budgetary ideas into life.

The budgetary policy decisions rolling outin October through December were hitting the federal revenues, in the firstplace. The revenues were dissipating for three principal reasons. First, thebudgetary take was undercut by government decision. Second, warning signalswere sounded about the government’s intentions, which dampened businesses’ enthusiasm about paying taxes.Finally, third, decisions lopping off the tax base of the federal budget weremade. Clearly, the first two reasons were most in evidence during the first fewmonths of the Primakov government – much more time is needed to change the tax system, as thegovernment was to seek approval of its decisions by thelegislators.

In its early months, the government made aseries of unorthodox decisions that exposed it to the lobbying crowd and showedits readiness to sacrifice federal revenues to please some interests.Typically, most of the government’s moves aimed to rewrite the decisions of the previous governments,which had discovered from their own experience the efficiency of netting-outoperations, custom-made tax payment schemes, indulgence of financialcarelessness of big businesses, etc.

In its search for political support, thegovernment went as far as signing separate covenants with giant taxpayers overwhen and how they were going to meet their obligations to the budget. The firstcovenant was signed with Gazprom, which was followed by a declaration of intentto keep up this practice. And more, according to Federal Tax Service officials,Gazprom was allowed to tie its tax payments to the arrears due to that gasgiant from public sector entities.

Simultaneously, decisions were taken topermit wholesale setoffs among enterprises and budgets at all levels, quite inthe spirit of the new government’s program products. The experience of 1996 and 1997 conclusivelyshowed that a mere mention of legitimacy being given to netting-out operationsprovokes a steep reduction of government revenues. Revenue denting was fated tohappen when the government notorious for its kid-gloved magnanimous attitudetoward real sector businesses, regardless of their financial standing, optedfor setoffs.

Significantly, as the government gave thegreen light to setoffs it abandoned vigorous efforts to take persistent taxdodgers to court. Summary bankruptcy proceedings were, in effect, outlawed. Theannulment of the bankruptcy proceedings against UralAZ (with Maslyukov as thepower behind it) is little less than a meaningful signal to other tax evaders.The frequent statements of the government’s intention to announce a taxamnesty worked to the same end. The government’s readiness to collect some taxesin kind was a further step to widen the revenue drain hole.

Taking the ax to the tax tree, thegovernment chopped down the ruling for VAT to be paid on an accrualsbasis11 and reverted to the voluminous catalog of goods slapped with VATat a rate of 10 per cent.12 Although deeper changes inthe tax system were tied to budget approval for next year, the deliberations onthe proposed tax relaxation that started in the fall of 1998 were an earlysignal that, for the lawmakers, keeping businesses busy was more important thancollecting taxes, even if than meant collecting few taxes.

In an effort to stabilize the ruble, theCentral Bank directed on September 11 a return to the previous requirement forexporters to sell 50 per cent of their forex proceeds on the home market. Thismeasure yielded a beneficial result in the short run. Over a longer term, itcreates an irresistible lure to understate the forex earnings remittable toRussia.

The government’s decisions on agribusiness andfood provision for the nation were contradictory in essence, yet equallydamaging to the budget.

Ostensibly, these steps were aimed to easethe situation of farmers and farm produce processing industries. In the goodold communist tradition of four decades’ standing, the governmentrestructured, at the cost of 5 per cent p.a. for the beneficiaries (practicallyfor nothing), the farmers’ arrears to the budget. Tax dodgers took it for a hint that taxevasion was to be tolerated and economically sound, while the law-abidingtaxpayers had to swallow the shortchange again.

To show its liberal side, however, thegovernment hastened to bring down import duties raised, months before, by theKiriyenko government to broaden the revenue base of the federal budget.Impatient to get the official endorsement of the action program, itreduced customs duties on a long list of foodstuffs, above all meat anddairy products.13 The government’s haste could be attributed to thefear, which haunted Soviet economy bosses, of food shortages (which normallyarrive in the train of their economic policies), the blunting ofimports’ competitiveedge as a result of the ruble devaluation, the pressure put to bear upon it bythe interests linked to food imports, and the difficulties of maintaining thehigh tariffs against the rest of the customs union (particularly with Belarus).Whatever point we look from, the decision works in a twofold way against thebudget, throttling the revenues, and the domestic producer, whose competitivepositions have been undercut. Obviously, the two decision packages have notbeen motivated by ideological considerations, but were squeezed out by lobbypressures from interests with many ties to the corrupt elements in the civilservice,

A factor to be reckoned with was the needto pay political bills. The new policy outlines suggested a closer union withBelarus. On his first official visit to the republic’s capital, Minsk, Primakov spokeabout his desire to apply that country’s positive experience in runningRussian affairs. The looming prospect of integration with Belarus demanded thatthe Russian government forsake some of its economic interests for the benefitof its ally. This can be achieved by doing Belarus at least two favors. First,the government decided to accept manufactured goods, farming products in thefirst place, from Belarus as payment of its debts to Russia, a measure ascostly as the renunciation of some tax revenues from Gazprom. Second, it was toclose its eyes to the gaping customs hole on Russia’s border with Belarus, whosegovernment was not prone to coordinate its customs policy with Russia. Clearly,the Russian government was going to pay its political bills.

Among the government’s other decisions, largelysymbolic gestures, the most important were a move to reinstate a system ofgovernment guarantees to individual businesses14 (coupled with an ardentrequest to Western governments for humanitarian food aid) and cancelation ofKiriyenko’s decisionto transfer the bank accounts of cultural institutions to the Treasury. Theabove, and some of the unnamed decisions, have much in common. First, they allremove most of the obstacles to continued corruption in the civil service andshadow business. Second, they are an amiable bow to the lobbies. Finally, farfrom reinforcing government, they undermine it, while at the same time givingmore scope to bureaucratic abuse in the interests of individuals and smallgroups.

It is only natural to expect the realbudget revenues to dry up, the cash component of the revenues to ebb, and,therefore, the non-monetary sources to finance spending to shrink.

The performance of the 1998 budget maytentatively be broken down into three periods – from January to March, March toSeptember, and September to year-end. The year opened with a seasonal slack inrevenue flow to the federal budget and a buildup of a large deficit (4.7 percent of GDP in January). This alarming deficit had been caused by high federalspending, which (in particular, the Credit Less Repayment section) recordedRb4.3 billion in revenues that had not been credited to the Central Bank. InFebruary, this spending item was not present in the budget, bringing thedeficit down to a sound 1.8 per cent of GDP.

Table 1.4

Federal budget execution in 1998 (per cent ofGDP)

MONTH

I

II

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