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. Last Updated: 07/27/2016

Chernomyrdin Goes for Broke In 1995 Budget

Last Thursday a somewhat unusual session of the Russian government was held. It was unusual not simply because it was a closed session that lasted from 10 A.M. to 8 P.M. The truly unusual thing was that the government considered and approved an unprecedentedly severe budget for the next fiscal year. Moreover, it managed to do this a full two months ahead of time -- itself an unprecedented feat.


After the Oct. 11 market panic, it might have been expected that the government -- and Prime Minister Viktor Chernomyrdin first of all -- would reconsider its economic program. The budget project that the cabinet of ministers considered last week was clearly intended for a completely different economic situation than the one that has taken shape since Oct. 11. There is still no reason to speak of a conspiracy against the ruble, although several indirect facts indicate that the Central Bank and the Finance Ministry, since the beginning of October, had sought a "point of equilibrium" at about 3200-3300 rubles to the dollar.


The Oct. 11 crash to nearly 4000 rubles to the dollar was a catastrophic surprise. However, the ensuing necessity of returning the ruble to the 3000 level was an even worse catastrophe, which resulted in a fundamental worsening of the country's budget situation. Instead of the financial reserves that the government might have received if the ruble had devalued properly, a new shortfall resulted from the crash.


The resignations of two key shapers of financial policy -- acting Finance Minister Sergei Dubinin and Central Bank chairperson Viktor Gerashchenko -- also presented an unexpected problem. The departure of these two figures who were well-known in the West and who had won the confidence of international financial circles means that future credits to the Russian government may be in doubt. The government had planned to cover its 30 trillion ruble 1995 budget shortfall primarily through foreign credits. During the recent International Monetary Fund/World Bank meeting in Madrid, I heard from a number of important financiers that only Gerashchenko, relying on his personal authority, was capable of securing major loans for Russia.


However, it would seem that these unexpected complication, the collapse of the ruble and the personnel shake-up, have acted like a kind of shock therapy on Chernomyrdin. On Oct. 10, Dubinin, who had just returned from a government session in Sochi, told me that the government intended to limit Central Bank credits in order to reduce the budget deficit from 6 percent of the gross domestic product to between 1.5 and 2 percent. At the Oct. 20 government session, Chernomyrdin stated that the draft budget for 1995 does not call for the Central Bank to play any role in covering the budget deficit. Moreover, he said that inflation would not exceed 1 percent per month.


If one does not dismiss such prognoses as economic romanticism, of which it is difficult to accuse Chernomyrdin, then it seems clear that the prime minister is going for broke. It is also clear that he would not be taking such stern action without the approval of President Boris Yeltsin. One can deduce that if he has received the go-ahead from Yeltsin, then the crisis in their personal relations must have already passed. And these days, that is no less important for Russia's economic reforms than a well-prepared budget is.