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. Last Updated: 07/27/2016

Economy To Receive Tougher Treatment

In a move that could help it secure greater financial assistance from the International Monetary Fund this year, Russia will pursue a tougher economic policy than the one outlined in the recent accord between the government and the Central Bank, Finance Minister Boris Fyodorov said Tuesday.


The minister, speaking at a press conference, effectively declared victory over Central Bank Chairman Viktor Gerashchenko, with whom he has had a long-running and often bitter public battle over monetary policy.


"Mr. Gerashchenko has practically signed all the documents we have argued about for so long", Fyodorov said. "I believe this is a milestone event".


He distributed copies of the agreement bearing the signatures of Prime Minister Viktor Chernomyrdin and the Central Bank chief.


The government has said that Russia's inflation rate, which ran at 17 percent in April, was caused by the loose credit policy of the Central Bank.


In an apparent effort to press his advantage, Fyodorov outlined even more stringent economic policies that the government would pursue.


If the government can hit the targets, something it has been unable to do in the past, the IMF may approve as much as $6 billion in assistance this year to Russia. The figure is $3 billion more than Russia would receive if the IMF accepts the terms of the agreement signed over the weekend.


Fyodorov said that while the agreement calls for inflation to be reduced to less than 10 percent monthly by the end of the year, the government was actually aiming for a 5 percent rate by December.


He also said he had submitted a draft decree to the government that calls for a moratorium on spending that will be discussed at a cabinet meeting Thursday.


Fyodorov singled out the part of the agreement calling for the Central Bank to raise its interest rates as "the most unexpected and biggest victory" for the government.


The bank - which now charges 100 percent interest, well below the yearly inflation rate and amounting to a subsidy to industry - has agreed to lend at only 7 points below the prevailing commercial rate, which is now about 170 percent. The bank has agreed to raise those rates by July 15, but Fyodorov called on Gerashchenko to do it sooner.


Fyodorov said that a key part of the agreement had been the bank's acceptance of the provision that all credits to industry go through a special credit committee, effectively ending direct Central Bank financing of enterprises.


The finance minister added that the Central Bank had also agreed that the debts between enterprises, which amount to 6. 8 trillion rubles, would not be paid with further money emissions from the government.


He said that the government would seek to limit its deficit for the year to about 10 trillion rubles ($10. 4 billion), in part by reducing subsidies to the oil and gas industries and to agriculture and by imposing extra excise taxes on oil and gas.


The deficit is expected to hit 7 trillion rubles ($8 billion) by the end of June.


Fyodorov added that export quotas, which limit what goods can be sold abroad and by whom, would be eased by two-thirds by the end of the year and that the government would slash import subsidies by as much as 40 percent.


In an interview after the press conference, Fyodorov acknowledged that there would be a social cost to the government's tighter economic policy, including a potential 3-5 percent unemployment rate by the end of the year. But he said this would not be as severe as in some Western countries and that Russia could afford such a rate.


The agreement with the Central Bank and the government is expected to clear the way for the IMF to provide Russia with $1. 5 billion as early as June and another $1. 5 billion by the end of the year.


The money will be given under special conditions designed specifically for Russia. The conditions are less stringent than those under which countries normally receive IMF aid.


But Russia could qualify for normal IMF financing if it complies with the more stringent fiscal conditions, according to a source familiar with the IMF negotiations. It failed last year to reach a similar agreement with the IMF.


The source said that the additional $3 billion may be difficult to disburse this year but that the potential exists for the loan to be approved and partially paid out.


"Everything is possible", the source said. "Russia may well continue the cooperation and consensus" that led to the recent agreement with the Central Bank. "On the other hand, you don't want to be naive".