High Cost of War Threatens Budget, Economy

The escalating costs of Russia's catastrophic war in Chechnya are threatening to wreck the government's budgetary plans for 1995 and launch runaway inflation.


Some estimates put the expense of the military campaign in the breakaway North Caucasus republic and the cost of restoring Chechnya's devastated economy as high as 15 trillion rubles ($4.1 billion) and set to grow further.


This would blow a huge hole in Russia's already overstretched draft budget, forcing the government to turn to Central Bank credits to bridge the gap and set free high inflation in the process.


"Financing expenditure on military operations in Chechnya derails the whole plan for a tight financial policy put forward by the government," Mikhail Zadornov, chairman of the State Duma's budget committee, told Ekho Moskvy radio Monday.


The liberal daily Segodnya, citing "circles close to the Russian leadership," reported Thursday that the Kremlin's own calculations put the cost of the conflict at 15 trillion rubles.


Reestablishing order in the region and rebuilding just some of the devastated republic's key facilities will require 10 trillion rubles, with the military campaign alone set to cost between 4.5 trillion rubles and 5 trillion rubles, the paper said.


And that's if the war ends soon, something that seemed unlikely Monday as Chechen fighters swore to continue the war even if the capital Grozny fell to the Russians.


The figures in Segodnya do not seem that far fetched. Sergei Yushenkov, chair of the Duma's defense committee and a member of the liberal Russia's Choice faction, told NTV's current affairs program "Itogi" that the Finance Ministry had already reported military spending for the conflict of between 3.5 trillion rubles and 4 trillion rubles.


The Economics Ministry, however, estimates that rebuilding the Chechen economy could cost as little as 3.1 trillion rubles if the destruction abates in the near future, Izvestia reported in its Tuesday edition.


The newspaper reported a senior Finance Ministry source as saying that the military operation cost 800 billion rubles in its first 45 days, around $4.7 million per day, and has so far been absorbed by the budgets of the Federal Counterintelligence Service and the defense and interior ministries. But the source said the "power ministries" are likely to demand up to 4 trillion rubles more from the budget if the conflict drags on.


Reuters reported a Finance Ministry source as saying Monday that the draft 1995 budget had been altered to take account of the war in Chechnya based on the Economics Ministry's estimates. State investment would be cut and other expenditures restructured, but the main figures in the draft would not be changed, the source said.


This may be enough to cover the cost of Chechnya for the moment. But if spending on the war really amounts to 15 trillion rubles, Russia's 1995 budget deficit would swell from a projected level of 7.7 percent of gross domestic product to around 9.5 percent. This would almost certainly jeopardize the $12.7 billion in credits that Moscow is seeking from international lending institutions.


A delegation from the International Monetary Fund -- which would provide the bulk of the credits -- is due to arrive in Moscow next week to discuss the conditions under which it would lend Russia the money.


If international funds are not forthcoming, Russia will have little alternative but to turn to cheap loans from its own Central Bank to finance the deficit, fueling inflation and making a mockery of government plans to reduce the growth of prices to a monthly rate of 2 or 3 percent by the end of the year. Monthly inflation hit an 11-month high of 16.4 percent in December, according to preliminary figures.


The costs of rebuilding Chechnya have been worsened by the extensive bombing and shelling of Grozny and the surrounding area. Some 420 oil and gas facilities have been damaged, First Deputy Prime Minister Oleg Soskovets told Interfax on Friday. And Chechnya's power grid needs repairs worth 260 billion rubles, the news agency said. Housing, roads, shops, offices and factories have also been severely damaged.


Added to this have been the costs of moving 10,000 to 40,000 troops plus equipment from all over Russia to Chechnya, 1,500 kilometers south of Moscow, as well as the cost of ammunition and fuel.


Dozens of Russian tanks and armored vehicles have been damaged, destroyed or captured and at least three helicopters have been downed. The weekly Moscow News reported Friday that as many as 182 Russian armored vehicles and tanks, plus 14 Russian helicopters and planes, had been destroyed.


Russia has also spent some 200 billion rubles on providing relief for an estimated 350,000 refugees who have fled the fighting, according to "Itogi."