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INSTITUTE FOR THE ECONOMY IN TRANSITION

RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES

September 1999

MONTHLY BULLETIN

Moscow

1999

© Institute for the Economy in Transition, 1996. Licence, ¹ 021018 of 09.11.95

5 Gazetny pereulok, Moscow 103918, Russian Federation

Phone: (095) 203-88-16 Fax: (095) 202-42-24 E- Mail: todorov@iet.ru

Economy and politics in September 1999

In September 1999, the situation in the economy has remained relatively favorable. The industrial growth which was taking place between January through August 1999made up 6% relative to the respective index of the prior year. The trade balance and the level of tax collection showed high values; the government has managed to pay of its pension debts, and inflation made up 1.6%. The tight measures which were introduced by the CBR with respect to regulation of transactions with the capital placed on ‘C’- type accounts, and the regular tranche from IMF allowed the Central Bank’ maintenance of the Rb. stable exchange rate, while the money supply remained practically unchanged.

Russia’s refuse from the World Bank’s credit because of the overestimation of efficiency of some projects may be regarded as a manifestation of rationality and responsibility of the country’s policy with respect to external borrowing. Nevertheless the problem of the Russian external debt has been the source of a potential danger for the economy. The success gained at the negotiations with the IMF has been neutralized in the second half of October by the news regarding the delay with the transfer of next tranche until late October. At the same time, the terms of the agreement with the London Club also require thorough consideration. The possibility to have even 50% of the debt, with the Vnesheconombank’s debt restructuring in the sovereign debt of the Russian Federation by itself is not as clearly favorable outcome for the national economy. Still, it is the terms and conditions of the restructuring which play a crucial part in this respect. The emphasis only on writing off the debt bears the danger of populism and may rather reflect primarily personal political ambitions of some government officials than an actual economic expediency.

The forthcoming elections and their growing impact on the economy during the period between late summer to early autumn 1999showed themselves primarily rather in the identification of spheres of influence and financial flows than in the macroeconomic populism. The shining illustration of this process became the events related to the change of Transneft’s management, and the same trend was proved by the intensification of non- economic methods of economy regulation. The strengthening of the political background encourages the growing instability and promotes further deterioration of the business climate

The debates regarding possible scenarios of the President’s resignation, escalation of military operations in the Caucasian republics, and the wave of terrorism have led to the fall in the society’s interest in economic problems. At the same time, the conflict between the legislative and executive powers (even the impeachment procedure), to say nothing of Cabinet reshuffles and changes of Premiers did not influence the security market as much. The fall in the RTS index to the value which became minimal for the period of the last three months (a 50% downfall compared with the maximal value in 1999) which occurred in mid- September, showed that the possibility of introducing the state of emergency, cancellation of elections became the very news to which the business’s reaction was extremely negative.

The negative attitude of both legislators and the executive power to the idea to introduce the state of emergency, perhaps, may testify the major political forces’ interest in the legitimized transfer of power. The fact that the State Duma declined the majority of proposed amendments to the Constitution on the grounds that the concrete mechanism of their realization had not be developed also is an optimistic signal.

It is fairly predictable that it will be difficult to pass the budget through the Duma, since the that is determined by the realities of the pre- election period and to a less degree depend on a real quality of the document submitted. The government should be interested rather in the protracted Duma procedures than in the adoption of a populist variant of the budget. The monthly financing equal to one- twelfth of the 1999budget gives the government some room for maneuver. The deputies, on the contrary, are oriented towards the expansionist budget, though the minimal figures set in the budget which more or less clear reflect actual financial possibilities of the state, sharply limit the room for lobbyism and even pre-election populism.

T.Drobyshevskaya

State of the federal budget

The data on execution of the federal budget during the period from January to July 1999 are represented in Table 1.

XII

I

II

III

IV

V

VI

VII

Revenue

Profit tax

2592

1061

986

2090

3264

4105

1890

2807

VAT, special tax and excises

14811

9849

7998

9729

11375

8679

9957

11857

Taxes on foreign trade and foreign economic activities

3714

1631

2461

3036

3001

2604

4390

4625

Other taxes, levies and payments

298

177

513

349

783

39

2843

1608

Overall taxes and payments

21416

12718

11959

15203

18423

15426

19081

20897

Non-tax revenues

11736

1645

65

2753

2621

2394

5200

3458

Total revenues

33152

14362

13383

16634

21044

18256

23854

24354

Expenditure

State administration

1388

131

503

572

627

324

491

448

National defense

5566

1562

2135

4343

3907

3606

3682

3776

Justice

557

17

126

119

219

115

158

195

Law enforcement activity

3408

302

1674

1645

2265

1772

1841

1245

Fundamental research

486

10

419

286

364

249

393

360

Services to national economy

3082

54

756

1101

2149

1390

1005

491

Social services

5985

1660

2750

2943

3488

2691

3165

2995

Servicing state debt

5604

5473

3725

6139

5056

8951

8665

8418

Other expenditure

15569

3358

6131

3977

4706

5329

12859

6460

Overall expenditure

41644

12566

15284

21125

22781

24427

32258

24387

Loans less repayments

-8493

1796

1379

1767

1552

43

-5810

530

Expenditure and loans minus repayments

38213

14187

16662

22892

24333

24470

26448

24917

Budget deficit (-)

-5061

175

-3280

-6258

-3289

-6214

-2594

-563

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