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. Last Updated: 07/27/2016

Bill Limits State Bank Budget Credits

The State Duma has passed a bill that officials said Monday would prohibit the Central Bank from issuing credits to finance budget spending, signaling Russia's determination to rein in inflation.

The government announced last fall that it would no longer use cheap loans from the Central Bank to finance its spending, since such credits fuel inflation. But some economists have said that without legal restraints Russia may in the future be tempted to revert to the printing presses to finance its budget.

"The law is the only means to curb the government's populist policy," said Boris Fyodorov, a liberal deputy of the State Duma, who drafted the law. "If the government lacks money, it must go to the market and ask whether we are eager to buy its securities."

Fyodorov was referring to the government practice of borrowing money from the Russian markets by selling huge amounts of treasury bills to finance state spending.

But economists have warned that the government's T-bills program, in which it is having to offer real annualized interest rates of over 500 percent, is turning into a pyramid scheme that could soon bankrupt the Finance Ministry.

Boris Sergeyev, a director of Tokobank, cast doubt on the government's ability to run the T-bill program prudently, and predicted the Finance MInistry would have to buy its own T-bills to support the budget.

"Any commercial bank, even the worst one, would manage T-bills better than the government," he said. "Moreover, under the present inflation rate, the government would have to repay more money on old debts than it would earn."

The bill, for which over two-thirds of the lower house of Parliament voted Friday, only requires the signature of President Boris Yeltsin within 14 days before becoming law.

Reducing monthly inflation to 2 or 3 percent by the end of the year is a key part of the government's economic plan for 1995 and is a condition for obtaining a $6.3 billion standby loan from the International Monetary Fund to finance part of this year's budget deficit. Inflation reached 17.8 percent in January.

An IMF team began high-level talks with government officials in Moscow on Monday that are widely expected to result in a deal being struck on the loan. (Page 12).

The law on the Central Bank also prohibits it from taking part in the activities of commercial banks, including the former Soviet savings bank, Sberbank, and former Soviet foreign tra banks, in which the state maintains a controlling share.

Fyodorov, a former finance minister, said the bill will force the Central Bank to sell its controlling stake in Sberbank. Sberbank officials were unavailable for comment Monday.

In a separate banking bill passed by the Duma on Friday, "On Banks and Banking," commercial banks would no longer have to obtain permission from the Central Bank and local authorities before setting up a new branch.

"The introduction of a new system for setting up branches signals a new choice in the development of the Russian banking system," said Alexander Turbanov, the member of the banking subcommittee of the State Duma who drafted the law.

Until now, regional authorities, in an effort to protect their home banks, often opposed setting up branches of banks from other regions, said Natalya Chukova, head of the legal department of Inkombank, adding that the new regulation would be "useful" for her bank.

But Sergeyev said the new bill, which will now pass to the Federation Council, makes the state of affairs even worse.

"Before, if we got permission to open a branch from the Central Bank but could not obtain it from local authorities, we complained to the Central Bank," he said. "Now we have no one to complain to, while local authorities will find their own way to make an unwelcome bank's life miserable anyway."

In a step that is likely to displease Western bankers, the new law on banking also codifies the principle of reciprocity in foreign banks' activities in Russia, which means that foreign banks would face the same demands that Russian banks encounter in their countries.

The powerful banking lobby has long complained that Western countries obstruct Russian banks from setting up branches. "The law does not contain anything tougher than the laws that have been passed against Russian banks," said Garegin Tusunyan, first vice president of the Russian Commercial Banks Association, who helped draft the law.

In other articles, the law "On Banks and Banking" confirmed the principles of international agreements signed by Yeltsin on Corfu last summer.

Until Jan. 1, 1996, only Citibank, of the United States, and the seven European Union banks that received licenses and started working before Nov. 15, 1993, will be allowed to serve Russian companies and individuals. Russian account holders must keep a minimum account balance of 55,000 ecus ($66,000).