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It was also important that the Duma'ssupport for the government made it possible to pass a law on productionsharing, which had been blocked for several years. This sent positive signalsto investors, especially foreign ones.

Steps were taken to tighten controls overpricing by the natural monopolies. Many tariffs were frozen, and some were evenreduced (e.g., for railroad transportation of some necessities, includingfoodstuffs).

Statistics and sociological data alsotestify to stabilization and an improved position of enterprises. After a rapidproduction decline in September output stabilized, demand began to rise, andthe share of idle production capacities decreased, especially in the fuel andenergy complex and the consumer goods and food-processingindustries.

Favorable changes also occurred in thesocial sphere. The government managed to use monetary sources to deal with someof the accumulated wage and pension arrears. Despite the fact that the value ofthe ruble decreased several times, the public mood was rather in favor of thecurrent authorities. The duality of the economic situation was also reflectedin the strike dynamics. In September, the number of striking enterprisesincreased more than 50 times and the number of strikers rose 40 times, and inOctober both figures doubled again. Although in November, the strike movementbegan to wane and fell to the September level (with 97 per cent of the strikesfalling to educational establishments), in December it began growingagain.

Nevertheless, according to findings ofsociological surveys, in November 1998, 53.2 per cent of the respondents wouldnot have supported protest action demanding that the government should resign.Yevgeny Primakov's personal popularity was also on the rise: during publicopinion polls, he was given a place among the five most probable candidates forpresidency (see Fig. 1.11).

Fig. 1.11

The Premier as the most trusted politicalfigure (percentage of those who singled out the Prime Minister
in a political credibility poll)

Source: VTSIOM monitoringdata

We see that the actual course of eventsclosely resembles the logic of economic populism described above. Monetaryfinancing, even if kept within modest limits, exerts a positive short-termeffect upon production and the government's popularity. But it is the monetaryindicators (together with the balance of payments) that send earlywarning signals while the indicators of real production continue to demonstratea positive dynamic.

1.3.4. Russia's social and economic
developmentprospects

The real economic development prospects for1999 will be determined by the operation of, above all, two factors: first, theimpact of the decisions (above all, in the taxation and structural spheres)adopted by the government in the first 100 days of its work and, second, theauthorities' ability to implement the approved budget thus achieving a stableand responsible fiscal policy. Of course, there will also be other factors thatwill make an impact, but at the moment they are difficult toforecast.

One can identify three main problems facingthe Primakov Cabinet which are critical to achieving macroeconomic stability.First, there is the problem of external financing, primarily reachingagreements with international financial organizations. Second, inflation mustnot be allowed to run amok. Third, the political field must be cleared for thegovernment’s ownpolitical activity.

Negotiations with the IMF and other lendershave been extremely hard. In principle, one may say that the West has apolitical desire to assist Russia in debt restructuring and, in future, even towrite off some of the debt. The World Bank is obviously ready to extend someloans, especially for investment projects. But there are problems that wouldnot be easy to resolve.

First of all, the IMF is afraid to makeanother mistake and give money just before yet another crisis. This is why theyare trying to prolong the observation of developments in Russia and give themoney at the last moment, when the payments deadline has arrived, if anothercrash does not happen by that time. Other things being equal, the deal may besigned by May. By that time, the government will have to demonstrate thestability of the approved budget as best they can.

Meanwhile, it will not be easy to supportthe stabilization trends that manifested themselves in early 1999. In spring,the government always encounters a rise of lobbying aimed at getting morebudget money. The main demands are for money (easy-term loans) for the sowingcampaign and for the "Northern deliveries". Agrarian lobbying is one of thestrongest not only in this country but everywhere in the world. "Northerndeliveries" often imply not only (and at times not so much) the interests ofthat region's residents but also the interests of banks desireing to be put incharge of these deliveries (and get cheap government loans). In the past, fewCabinets were able to stand up to such pressure. In addition, we areapproaching elections, which are another factor of political pressure operatingtowards financial destabilization.

To consolidate his political position,Primakov took a number of unorthodox steps. First of all, he initiated a treatyon public accord; its main (if not the only) meaningful provision obliged theparties to refrain from attempts to fire the government. (Obviously, thiscreated guarantees for the Prime Minister alone, because the resignation ofother government members occurs as a matter of routine.) Despite his sharplynegative initial response to the letter which formulated this initiative, inlate February Boris Yeltsin declared his intention to complete his term inoffice with Primakov as the Prime Minister. (True, similar declarations madeabout other government members in the past were rarely acted upon.)

It is not easy to ensure popularity for aprime minister when real government expenditure (and, consequently,commitments) have practically halved, causing the government to refuse to indexthe budget-paid wages and pensions although prices have doubled. In thisenvironment, a battle against corruption is an effective way of distractingpublic attention, at least for a few months. With this end in view, the PrimeMinister is promising large-scale arrests on corruption charges and is makingunabashedly populist statements about private property.18

Primakov also supported the governors'desire to control federal property, having proposed a compromise solution: totransfer part of federal property in trust to the regional authorities. Theavailable experience of the government's trust agreements in industry showsthat as a result, the trust-holder in fact becomes a full-blooded (albeit atemporary) owner of the property in question.

Primakov openly proposed that the topleaders of the RF constituent members and of local governments be appointed bythe relevant higher-ranking executive authorities and not elected. Thegovernors were offered an opportunity to appoint heads of municipalities inexchange for agreeing not to be publicly elected. This deal may be attractiveto most governors. They have long fought for total control over themunicipalities (especially towns), and this would give them a much broaderopportunity to control regional financial flows. Defending their position inthe corridors of power is, for many of them, a much more attractive propositionthan taking part in election campaigns.

The government is also taking importantsteps to consolidate its political position in the fuel and energy industry.Following the establishment of a corporation of coal companies in the Kuzbas,the government expressed its readiness to merge state-owned oil companies(Rosneft, Slavneft, ONACO). And, although the commercial sense of such projectsis doubtful, at a certain point they may be used as funding sources forelection campaigns.

And, finally, the Prime Minister ismanaging to neutralize his potential political rivals and even turn them intoreluctant allies. In February, it became known that Viktor Chernomyrdin may beappointed chairman of the board of directors of Gazprom. The federal centercame to the aid of Alexander Lebed in a struggle for influence on financialflows in the Krasnoyarsk Krai. There is the simultaneous consolidation offinances that could be used, if need be, for political purposes. In otherwords, Primakov now has only one serious rival, namely, YuriLuzhkov.

A special effect upon the economic andpolitical situation will be exerted by the practical implementation of afederal budget whose passage through the State Duma was the government'striumph.

Macroeconomic prospects and fiscalpolicy

The key budget parameters for 1999 and theparameters of the 1997 and 1998 budgets (for comparison) are presented in Table1.16.

Table 1.16

Key federal budget parameters
for 1997 to 1999

1997

(per cent of GDP)

1998

(per cent of GDP)

1999

(per cent of GDP)

Income tax

0,1

0,0

0,6

Profit tax

1,4

1,2

0,9

VAT

4,5

3,6

3,6

Excises

1,9

1,6

2,2

Tax on foreign trade

1,1

1,2

2,3

Othertaxes

0,4

0,5

0,4

Total taxrevenue

9,4

8,1

10,0

Nontax revenue

3,1

1,9

1,9

Totalrevenue

12,5

10,1

11,8

Governmentadministration

0,4

0,3

0,3

Law enforcement andjustice


1,7


1,1

1,4

Defense

3,1

1,8

2,3

Science

0,4

0,2

0,3

Services to the nationaleconomy

2,0

0,8

0,9

Social expenditures

1,9

1,9

2,0

Government debt service

1,6

4,1

4,2

Otherexpenditure

4,8

3,1

3,0

TOTALEXPENDITURE

15,8

13,1

14,4

Deficit

-3,3

-3,1

-2,5

Domestic financing

1,3

-0,6

1,4

External financing

2,1

3,6

1,1

Sources: RF Ministry of Finance, estimatesby the book’sauthors

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