Shokhin Sees End to Bank Credits for Deficit

Russia wants to stop using cheap credits from the Central Bank to finance its budget shortage, Deputy Prime Minister Alexander Shokhin said Tuesday at a seminar organized by the International Monetary Fund.

"We want to deny the government Central Bank credits to cover budget deficits," Shokhin said. "We want to have a workable budget, not an unrealistic one."

Shokhin said Russia would use "non-inflationary" resources to cover next year's budget deficit.

Shokhin's comments came as a senior delegation from the IMF is in Moscow negotiating a $4.1 billion standby loan program. The delegation -- which includes Ernesto Hernandez-Cata, one of the IMF's top experts on Russia -- is meeting with Russian officials throughout this week and the beginning of next to discuss the country's 1995 budget and the loan.

To receive the loan, Russia must commit to specific economic targets, including deficit and inflation reduction and stronger monetary reforms, observers said. The IMF has been unhappy with Russia's pace in reducing its budget deficit and monthly inflation.

"The way the government has financed the deficit has created an inflationary cycle," a senior Western economist said. "Russia is leaving itself with its hands tied."

When faced with deficits, most Western countries issue treasury bills, usually long-term debt obligations backed by the government. In Russia the effectiveness of the bonds has been hampered by quick maturities, high inflation and low investor confidence, economists said.

Russia has been able to sell short-term bonds of three and six-month lengths. But these bonds have high returns, which makes them expensive for the government to pay down.

Since it does not have a strong long-term treasury bond program, Russia has been financing its debt by printing money, causing inflation. The Central Bank has also made it easy for businesses to get credit, another inflationary move.

"It is very hard to induce buyers to hold onto longer-term issues," one Western economist said. "The net gain Russia makes from financing its deficit with treasuries isn't going to solve its deficit problem."

Without a successful treasury-bill program, Russia needs to increase revenues and decrease expenditures to cut inflation, economists said. Ways of increasing revenues include raising taxes and generating more money from the privatization process.

"The time is coming close when Russia should try to avoid excessive external financing," IMF expert John Odling-Smee said at the seminar, Reuters reported. "Instead it should try to reduce its budget deficits."