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. Last Updated: 07/27/2016

Industrial decline aggravates budget

In the absence of massive foreign credits, Russia may be caught in the grips of a Catch-22 situation.


As industrial production plummets in the Russian Federation, the government may be forced to relinquish its tight grip on both budget and money supply to revive factories on the brink of collapse.


"We expect a solvency crisis at numerous plants and mass scale bankruptcy, although the situation should not be overdramatized", said Andrei Nechayev, Russia's minister of the economy at a news conference Wednesday, noting that the government will selectively pump in new funds but will not offer credits or subsidies to all manufacturers.


Nechayev told reporters that according to recent government estimates, production declined 15 percent in January and 12. 5 percent last month. But while the February figure is a slight improvement, a stalled privatization program may force the government to do what it fears most: print more money to prop up industry.


State pensioners are also tugging at the Russian government's purse strings. Nechayev said Russia is now drafting plans to double minimum pension and wages levels under which pen-sioners will receive an additional 200 rubles for February and March to "help these people through tough times".


In what may be a coincidence, the ruble has lost virtually all of its February gains over the past two weeks, despite strict budgetary and monetary policies adopted by the Russian government in January.


Since early March the currency's street value has dropped more than 50 percent from roughly 80 rubles per dollar to a present black market level exceeding 130 rubles per dollar in some areas.


Nechayev disagrees, calling the ruble's fall a temporary glitch.


"This is an accident", Nechayev said. "I continue to believe strongly that the dollar will continue to decline". He called the ruble's depreciation "psychological".


Russian officials over the past month have called for an eventual rate in the range of 25-35 rubles per dollar, which many call unrealistic. and despite Nechayev's claim, most observers say the ruble can go nowhere but down, given these pressing budgetary needs.


There may be some temporary breathing room, though, with recent Italian credit breakthroughs in the aftermath of Russian President Boris Yeltsin's visit there earlier in the month. Two credit lines have been unfrozen, and a third could be shortly.


The first, $1 billion in credits for raw material purchases, will no doubt help revive some sagging industries. The second, a roughly $800 million credit to help repay the commercial debt of the former Soviet Union, will ease budgetary constraints.


Another credit for $200 million is in flux over differences in how it should be applied. The Russian government wants it allocated for small scale projects such as brick making factories and automobile production equipment, whereas the Italian side is gunning for a largescale power generation project, Nechayev said.


This loan will be discussed again today when the Italian delegation arrives in Moscow.