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. Last Updated: 07/27/2016

Economic Accord: A Political Business

The recent agreement between the Central Bank and the government over tighter fiscal policy is likely to prove an historic milestone in Russia's development - but from a political rather than an economic point of view.


The agreement sets ambitious targets for inflation -10 percent monthly by December - and for the government deficit -10 trillion rubles for the year. But it will not usher in the long-awaited "shock therapy" reform that Russia has so far avoided.


As Alexander Khandruyev, the bank's deputy governor said Wednesday, the government does not even have enough accurate information to know whether it will meet its targets. What information it does have indicates that it will not.


In a political sense, however, the agreement - which was signed on Saturday and was the first ever to be reached between the bank's chairman and Russia's prime minister - is a watershed.


The Central Bank, which answers to Russia's conservative-dominated legislature, has not handed over its authority to the government. But it has agreed in some areas to share power, in other areas to defer to the government, and in still other respects to be governed by certain market mechanisms and guidelines.


This is a dramatic shift from the way key Central Bank decisions have been made in the past, mostly at the whim of the Central Bank chairman, Viktor Gerashchenko.


In that the agreement directs the bank, and indeed the government, to make policy according to guidelines, it may not give the government control over the economy. But it will create the possibility that the economy can eventually be controlled.


It is no coincidence that the agreement followed the victory of President Boris Yeltsin in the referendum and the surprising acceptance of his economic policy. Gerashchenko found himself doing the economic bidding of a weakened and splintering parliament, which backed policies without popular support.


With a more significant battle - one involving its very existence - looming over the adoption of a new looming over the adoption of a new constitution, parliament has apparently stepped back from its economic dogfight with the government.


Finance Minister Boris Fyodorov said this week, for example, that parliament has decided to let the government resolve the issue of the huge debts that have grown between enterprises, which Fyodorov estimated at 6. 8 trillion rubles.


"They dramatically changed their attitude . . . and decided to let the government handle the whole matter", Fyodorov said. "That, too, marks a curious change in the parliament's mentality".


The cost of siding with parliament would have been foreclosing Russia's opportunity to gain $3 billion in assistance from the International Monetary Fund under a facility set up specifically for Russia. Failure to strike the accord, which is needed for IMF approval, would have amounted to an international embarrassment. To side with the government, however, gives Gerashchenko an eventual out.


"Mr. Gerashchenko's position might be, 'I didn't want such tight limits, but if the government insists, we shall see what it does with the results", said Sergei Aleksashenko, an economist with the Expert Institute of the Industrialists Union.


In other words, Gerashchenko, who began distancing himself from the agreement the day after he signed it, can claim part of the credit if the tight fiscal policy works; if it fails, he can simply say "I told you so".


Still, on Wednesday Gerashchenko signed an addendum to the agreement setting out the forecasts and other statistics on which its targets are based. In that he was dealing from a weakened hand, Gerashchenko probably got as good a deal as he could get.


The agreement does not strictly take away authority over credits and interest rates from the bank. It simply states that, as to credits, the bank must auction them off to commercial banks through market mechanisms; as to interest rates, which it used to set according to its will, the bank must now peg them at 7 percent below the commercial rate.


The government picked an economically advantageous time to announce its tighter policy, after a period in which it had been doing just the opposite.


The government and the Central Bank just completed a huge credit issuance in April, in part to pay for the spring planting. Credit issues grew by 23 percent in March, the highest figure to date, and the currency supply grew by 26 percent in April.


According to Aleksashchenko, there will not be a strong demand for credits again at least until the end of the summer, when industry begins to stock up for winter and when money is needed for the harvest.


It remains to be seen whether the government and the Central Bank will be able to resist the tremendous pressure for credits from interest groups, including industry, miners and the army, that will come in the fall. Only then will the document prove whether it is a true historical milestone or not.