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. Last Updated: 07/27/2016

Stabilizing the Economy

Moscow. For anyone who has experienced life in the Soviet Union, it is exhilarating to live in Moscow today. A multitude of nice, elegant shops and restaurants have emerged. Only four years ago, few could imagine a Russia without shortages. An apparent construction boom prevails, salvaging much of the city's architectural inheritance. Good Russian professionals thrive and many have achieved Western standards of living. People work more and harder than they did under communism.


The concerns boil down to corruption, crime, bad traffic, bad roads and extremely inflated prices. Clearly, this is not the tragedy depicted in the Western media. Russia's transition to capitalism has already succeeded, although the social costs and corruption would have been less, if the path followed had been straighter.


What will happen to the Russian economy this year? The central economic concern remains inflation, and it is likely to fall sharply. The trend is clear: 2,500 percent inflation in 1992, 840 percent in 1993 and 224 percent in 1994. We should expect inflation to fall below 100 percent in 1995. Hence, Russia should face a real revaluation of the ruble, and the average dollar wage should rise.


One reason for this expectation is the shock caused by Black Tuesday, Oct. 11, 1994, when the exchange rate fell by 27 percent in one day. For the first time in Russia's modern history, the currency market overthrew most of Russia's economic decision-makers, and the outstanding Russian destabilizer, Viktor Gerashchenko, was at long last ousted from the Central Bank of Russia. The reaction showed that strong, real economic interests favor stabilization.


The new economic team was appointed with the task of financial and monetary stabilization, and they take it far more seriously than their predecessors did. Russia already has the necessary monetary and fiscal control systems.Last year, the consolidated state budget deficit was 10 percent of the gross domestic product, or GDP. This year's preliminary budget has a deficit of barely 8 percent of GDP. However, if the government's overly optimistic financing expectations are not met, the Russian government will have to cut its deficit further toward 5 percent of GDP, and then real price stabilization would be within reach.


Technically, that would be easy. Russia's total public expenditures remain far too high -- at about 50 percent of GDP -- and the much-heralded collapse of state revenues has not occurred.


To achieve the necessary spending cuts, it is enough to beat one of three privileged lobbies and force them to face normal market conditions: the oil, gas or agrarian lobbies. Since the agrarian lobby is a tough nut in any country, the natural target is the oil lobby.


At the end of 1994, oil prices in Russia were only one quarter of the world market price because of a domestic surplus caused by strict export controls. You would expect oil-company executives, who own between 5 and 25 percent of the shares of their companies, to lobby for free exports to raise the domestic oil price and thus increase both profits and the value of their stocks. However, they do not.


The reason is allegedly that they benefit personally from exports of limited amounts of oil, bought at low domestic prices and sold at high world-market prices. The greater the price differential, the more they gain. High and arbitrary profit taxation means that no manager wants to maximize public profit, even if the oil industry pays minimal taxes. If the whole new surplus arising from a liberalization of oil exports was taxed, it could contribute tax revenues of no less than 5 percent of the GDP.


Nor are the oil executives interested in high stock prices, as they are trying to buy as many shares as possible. The cheaper the stocks are, the more they can buy. Curiously, in the government, only First Deputy Prime Minister Anatoly Chubais and Economics Minister Yevgeny Yasin have called for the liberalization of oil exports to stop these malpractices.


In the longer run, however, the oil executives will need more capital, and to attract capital, they will have to show profits. As the interests of the oil executives change, the current malpractices are likely to disappear.


Russia's most notorious lobby, however, is Gazprom, the gas monopoly company. It was created by the last Soviet energy minister, Viktor Chernomyrdin, and it was exempted from virtually all taxes by Russia's current prime minister, the same Chernomyrdin, who has become one of Gazprom's largest shareholders. With its new palace in southwestern Moscow, it displays its subsidized wealth.


Contrary to the textbook monopoly, Gazprom keeps prices below market levels, but it demands restitution from the state treasury. If the gas industry were properly liberalized and taxed, it could contribute no less than 7 percent of GDP in taxes.


While the agricultural sector pays few taxes in most economies, producers of energy exports tend to be major taxpayers. The Russian anomaly appears to stem from one person: Chernomyrdin. When either the oil or gas industry is liberalized and properly taxed, Russia should be able to approach financial stabilization.


The IMF can do little to accomplish that. Russia has such a poor track record with the IMF that a liberalization of the energy industry appears more likely if Russia is forced to seek additional tax revenues because of a lack of IMF funding than if Russia receives IMF financing on the condition of export liberalization.





Anders ?slund is a Senior Associate with the Carnegie Endowment for International Peace and an economic advisor to the Ukrainian government. He contributed this comment to The Moscow Times.