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. Last Updated: 07/27/2016

Inflation Risks an Explosion

Warning that the economy was on the verge of hyperinflation, Deputy Prime Minister Boris Fyodorov on Wednesday announced that the Russian government would return to tight monetary policies for 1993.


Fyodorov, the government's top economic strategist, told a news conference that after "heated discussion" at a meeting earlier Wednesday, the cabinet had agreed to set ambitious monetary goals.


"We will seek to reduce monthly inflation to 5 percent by the end of the year", he said, adding that the government would try to reduce its budget deficit to 5 percent of the gross domestic product, down from the current 11 percent.


Fast-track reformers were apparently able to sway supporters of a more gradual transition to the market to the view that tighter monetary policy was the only way out of Russia's economic crisis.


Deputy Prime Minister Anatoly Chubais, speaking at the same news conference, said that the looser monetary policies of the second half of 1992, adopted under pressure from industrialists, had brought Russia to the brink of hyperinflation.


"Because of a series of compromises, additional money was pumped into the economy and this resulted in monthly inflation of 25 percent by December", he said.


"In January, the situation is even more alarming. Weekly inflation is as high as 10 percent", he said. "If this trend continues, we will reach 50 percent per month, a critical level. Once we cross that threshold we will have hyperinflation and capital flight".


Chubais said that looming hyperinflation posed a threat to the progress made last year on the ambitious program crafted by former acting Prime Minister Yegor Gaidar to bring a market economy to Russia.


"We are deeply convinced that inflation is problem number-one, even if we have other problems", Chubais said. "If we cannot defend people from the unrestrained growth of prices, then we will destroy everything we have accomplished in terms of reforms".


Fyodorov said that some members of the government had fought Wednesday for a relaxed policy that would release credits to support industry, thereby releasing more money into the economy - the opposite of what he hopes to achieve.


Prime Minister Viktor Chernomyrdin, who replaced Gaidar in December, has said that the government must make economic recovery its priority after a 20 percent fall in industrial output in 1992. He has spoken out in support of tight monetary policy, but has paradoxically also advocated increasing subsidies to state-owned firms.


On Wednesday, Chernomyrdin apparently agreed that the cabinet's main task should be countering hyperinflation.


Fyodorov said that the cabinet had voted "to stay on the course that was approved last year". He said that the government planned to slow down the slump in production, but that it was "no national tragedy" if ineffective producers reduced their output.


"Sometimes people tend to be fundamentally pro-production for the sake of production, forgetting the fact that production is for the sake of the people", he said.


Fyodorov's plan calls for stabilizing the ruble in the second half of 1993. The currency fell to a new low of 474. 5 to the dollar on Tuesday, down from 415 at the beginning of the year.


Fyodorov said that the government would establish quarterly ceilings for the budget deficit, and that new methods of budget financing would be established, such as issuing government bonds. He also said that the Central Bank would raise interest rates to stimulate savings and develop an interbank capital market to improve methods of financing.


The fast-track reformer's apparent victory in the government on Wednesday is good news for foreign creditors and the International Monetary Fund, who have set strict monetary targets as a condition for Russia receiving continued economic assistance.


But the reformers will face considerable opposition for their program in the legislature and at the Central Bank, both of which have advocated increased subsidies and credits.