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As for budget expenditure, most amendmentsthat increased its size applied to: social expenditure (by Rb1,400 million),industry expenditure (by Rb1,100 million), expenditure on law enforcement (byRb800 million), and expenditure on financial support for the regions (Rb3,500million). Redistribution was done at the expense of expenditure on governmentadministration (cut down by Rb1800 million) and some other items (by Rb6,600million).

The draft law was passed by the State Dumain its fourth reading on 9 February 1999, approved by the Council of theFederation on 17 February 1999, and signed by the President on 22 February1999.

The execution of the federal budget inJanuary 1999 shows that in real terms, tax revenues dropped by 20 per cent fromJanuary 1998, with income tax revenues declining the most (by 80 per cent), andVAT and other indirect tax revenues the least (16 per cent). The latter can beexplained by the fact that indirect tax revenues drop the least as a result ofinflation, being adjusted automatically as prices go up.

Overall federal budget expenditure (in realterms) almost halved from January 1998 and declined by 60 per cent as comparedto the top figure recorded in March 1998. As for individual items of federalbudget expenditure, only expenditure on the servicing of the government debtremained, in real terms, at the 1998 level, while social expenditure dropped by45 per cent, industry expenditure 92 per cent, and defense expenditure 70 percent. Unlike in January 1998, a surplus of 1.5 per cent of federal budgetexpenditure was recorded this year.

Monetary policy

Developments in the sphere of monetarypolicy after August 1998 can be divided into three phases. The rapid rise inprices and the fall of the ruble exchange rate in September gave the fiscalauthorities an opportunity to increase money supply without inflationaryconsequences and contributed to a perceptible decrease of the foreign currencyexchange rate. This made it possible to use September and October to increasethe RF Central Bank's foreign exchange reserves without a serious devaluationof the ruble and immediate acceleration of inflation. That was the case up tothe end of October. A turnabout occurred between October 10 and November 10:the forex reserves first stabilized and then began to decline. Three weekslater, the inflation rate and the decline of the nominal ruble rate bothaccelerated. However, the RF Central Bank's tight monetary policy andintervention on the foreign exchange market made it possible to slow down theinflation rate in January-February 1999. At the same time, the depletion ofgold and forex reserves continued. Let us examine these phases in moredetail.

In September 1998, the economic andfinancial crisis related to the ruble devaluation and declined confidence inthe Russian national currency continued to exacerbate. The over 60 per centruble devaluation and the sharp increase of the velocity of money caused arapid rise of consumer prices. In the first week of September alone, theconsumer price index rose by 35.7 per cent (see Fig. 1.7). Later, however, theinflation rate slowed down along with the declining US dollar exchangerate.

As has already been noted, the decelerationof the inflation rate in mid-September 1998 can be largely explained by theabsence of growth in money supply in August 1998 (see Fig. 1.8 and Table1.11).

In September, the Central Bank stepped upmoney-printing aimed at maintaining the banking system's liquidity and ensuringpayments to the clients. In September-October, Rb26.1 billion was printed,which corresponds to a 16.45 per cent increase of money supply from the end ofAugust 1998. The beginning of currency issue did not, however, accelerate thegrowth in prices. In October 1998, the consumer price index rose by 4.5 percent, and in November, by 5.7 per cent, which amounts, respectively, to 69.6per cent and 94.5 per cent in annual terms. This can be explained by a varietyof reasons, including lower inflationary expectations,15 technicallags between the outset of currency issue and its effect upon the inflationrate, and the lower money multiplier that emerged in the course of the bankingcrisis.

By the end of 1998, inflationary processesin the Russian economy began to gradually accelerate (see Fig. 1.7). After asignificant price leap in September, which ensured price stability over thefollowing month or two, in December 1998 consumer prices rose by 11.6 per cent.This means that in 1998, inflation in Russia was 84.3 per cent, or an averageof 5.2 per cent a month. But the price growth throughout the year was uneven:while in the first seven months the consumer price index rose by only 4 percent (an average of 0.56 per cent a month), between August and December theprices increased by 77.2 per cent, or 12.1 per cent a month.



Table1.11


Base money
(in blns of Rbs)

Rate of change in base money(%)

Gold and forexreserves
(in blns of USD)

Rate of change in gold and forexreserves (%)

10-16.8.98

160,7


15,1

17-23.8.98

161,8

0,68%

13,4

-11,26%

24-30.8.98

158,7

-1,92%

12,7

-5,22%

31.8-6.9.98

162,8

2,58%

12,3

-3,15%

7-13.9.98

167,3

2,76%

12,3

0,00%

14-20.9.98

170,3

1,79%

12,0

-2,44%

21-27.9.98

171,2

0,53%

12,4

3,33%

28.9-4.10.98

174,8

2,10%

12,8

3,23%

5-11.10.98

183,9

5,21%

13,3

3,91%

12-18.9.98

185,9

1,09%

13,1

-1,50%

19-25.10.98

184,8

-0,59%

13,3

1,53%

26.10-1.11.98

185,3

0,27%

13,6

2,26%

2-8.11.98

191,5

3,35%

13,4

-1,47%

9-15.11.98

192,3

0,42%

13,1

-2,24%

16-22.11.98

192,9

0,31%

13,0

-0,76%

23-29.11.98

191,9

-0,52%

12,8

-1,54%

30.11-6.12.98

193,3

0,73%

12,1

-5,47%

7-13.12.98

194,0

0,36%

12,0

-0,83%

14-20.12.98

192,5

-0,77%

11,9

-0,83%

21-27.12.98

199,0

3,38%

12,3

3,36%

28.12.98-3.1.99

207,3

4,17%

12,2

-0,08%

4-10.1.99

203,0

-2,07%

12,0

-1,64%

11-17.1.99

205,4

1,18%

11,9

-0,83%

18-24.1.99

202,2

-1,56%

11,6

-2,52%

25-31.1.99

201,1

-0,54%

11,6

0,00%

1-7.2.99

204,7

1,79%

11,6

0,00%

8-14.2.99

207,1

1,17%

11,3

-2,59%

15-21.2.99

205,8

-0,63%

11,4

0,88%

22-28.2.99

205,2

-0,29%

11,5

0,88%

Source: RF Central Bank

The situation began to change back inNovember 1998. The dynamic of the RF Central Bank gold and foreign exchangereserves changed direction (see Fig. 1.9 and Table 1.11). Throughout November,these reserves went down from $13.6 to $12.8 billion, that is, by $800 million.In November 1998, the RF Finance Ministry used the Central Bank money to makethe payments on foreign debts. On November 27, the Finance Ministry madepayments on the first tranche of five-year Eurobonds to the amount of $46.3million, and on December 2, paid $216 million on IAN bonds. During thepreceding month or two, the Central Bank had done its best to smooth out thedollar rate vacillations, but by end-November-early December, the ruble ratefell from 18 rubles to 20-21 rubles to the dollar. In December, the RF CentralBank’s gold and forexreserves continued to dwindle. In the first three weeks of that month alone,they diminished by $900 million. In late December, the RF Government madepayments on Eurobond coupons to the amount of approximately $330million.

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