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. Last Updated: 07/27/2016

Government to Sell Dollars to Finance Deficit

Russia has signalled its determination to rein in the country's money supply by changing the way it finances deficit spending, according to a new Finance Ministry report.

The report, published by the ministry's Russian-European Expert Group and obtained by The Moscow Times on Monday, said the government decided two weeks ago to "reduce the need for credits from the Central Bank by selling some of the government's international reserves," and has already begun financing budget payments from its waning hard-currency stocks.

"They are selling dollars and raising rubles to pay for budget expenditure," Jochen Wermuth, who heads the research group, said Monday.

The move should have a positive effect on inflation by reducing the amount of new rubles pumped into the economy. Economists have cited Central Bank credit emissions as the main culprit behind rising monthly inflation, which is expected to grow further this month after reaching 7.7 percent in September.

The switch in financing comes as Russia, its economy shaken by the major devaluation of the ruble, is negotiating a $4 billion standby loan and $6 billion currency stabilization fund with a delegation from the International Monetary Fund.

At issue in the discussions is the budget for 1995, which counts on Western credits as an integral part of deficit financing. Foreign Trade Minister Oleg Davydov said Monday that the draft budget envisaged a total of $12.7 billion in foreign loans.

The Finance Ministry report said that use of international reserves and foreign loans, along with increasingly large issues of government securities, to finance deficit spending represents a significant break from the inflationary emission of Central Bank credits.

"The aim is to finance a larger share of the deficit with T-bills and public debt and with what is hoped to be a last significant injection of foreign credits," said the report from the research group, which is sponsored by the European Union's TACIS program.

Russia's budget deficit for 1995 is targeted to come in at 8.3 percent of gross domestic product, compared with a likely level of more than 10 percent this year.

According to the report, Central Bank credits to finance the deficit will not exceed 3-5 percent of GDP in the fourth quarter of 1994. But it did not say how much reserves would be spent on the budget by the end of the year.

The Central Bank has said its hard-currency reserves were dangerously depleted by its defense of the ruble two weeks ago and amounted to a mere $1.8 billion. Economists have disputed this figure, however, and some have accused the government of deliberately pushing down the ruble's exchange rate to buy cheap rubles to finance the budget.

The report also said that the government's "loose money" reputation was unfair: "Russian authorities have for the first time more than met their monetary base target specified in their statement to the IMF of April 1994."

The Central Bank was widely criticized for increasing state credits during the summer by as much as 7 trillion rubles per month, but the research group said that this had been done to preempt seasonal demands from lobbies and that these credits had been slashed later in the year.

"Credits to the government in July (7 trillion) and August (6 trillion) were deliberately high to allow for lower credit levels further on," the report says. "As a result of the shift in credits away from the fourth quarter of this year, officially agreed monthly credit ceilings for the fourth quarter are only 4, 3 and 3 trillion rubles, leading to a record low in quarterly Central Bank credits in percent of GDP."

According to the report, the government has succeeded in cutting expenditure from 35.3 percent of GDP in the last quarter of 1993 to 32.8 percent in the first half of 1994.

The effect of the government's stricter monetary policies, the report says, has been to reduce inflation to an annual rate that is not expected to exceed 180 percent, compared over 800 percent in 1993.

The 1995 budget that is currently being discussed by the government plans to bring inflation down even further to around 27 percent for 1995, with a monthly rate of 1 percent or less by the second half of the year, the report says.

Ultimately, however, Russia's ability to finance budget expenditure without resorting to state credits and thereby lower inflation will depend on receiving foreign credits and hard-currency export earnings."It directly depends on foreign financing," said Arkady Volkovich, an economist with the Russian-European expert group. "It also depends on government policy toward the energy sector, on revenues from selling oil and gas abroad and on whether there is success in enlarging these sales in 1995 and '96."

The Foreign Trade Ministry said Monday that Russia's trade surplus will grow to $19.1 billion next year, compared with $18.3 billion this year, Reuters reported. Exports would increase to $49.1 billion from $45.7 billion in 1994.

Separate figures from the Economics Ministry forecast a decline in GDP of between 6 and 8 percent from 1994 in real terms, the news agency reported.