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. Last Updated: 07/27/2016

'Doomed to Improve'

Russia's first post-Soviet parliamentary elections in December 1993 were followed by big changes at the top. In response to the victory by opposition parties, notably Vladimir Zhirinovsky's Liberal Democrats, Prime Minister Viktor Chernomyrdin bid good riddance to the era of "market romanticism," and First Deputy Prime Minister Yegor Gaidar, the architect of Russia's reforms, left the government, with other free-marketeers in tow.

As it turned out, the changes were more symbolic than substantive: While inflation shot up wildly and the ruble plummeted in the immediate aftermath of the ministerial shake-up, Chernomyrdin's government eventually adopted a tough anti-inflationary policy that won over skeptics and was music to the ears of international lending institutions like the International Monetary Fund.

And the government stuck to its guns: While 1995 began with monthly inflation at 17.8 percent, some analysts predict that last December's rate, once the numbers are crunched, will turn out to have been less than 3 percent.

Yet, despite these successes, last month's parliamentary vote was hardly a ringing endorsement of market reform. Not only did the Communist Party of the Russian Federation come in first, with 22 percent of the vote, followed by Zhirinovsky's party, with 11 percent; Viktor Anpilov's neo-Stalinist party, Communist and Working Russia for the Soviet Union, outpolled Gaidar's Democratic Choice of Russia.

Even Yabloko, the only party with a real reformist pedigree among the four to break the 5-percent barrier and make it into the parliament, has been a consistent critic of both Gaidar's and Chernomyrdin's monetarist approach to the economy.

Big changes? No

Regardless of the new legislature's distinct leftward tilt, there will be no cardinal changes in the government's fiscal and monetary policies, say analysts. At least that holds, they say, until the outcome of the June presidential elections.

Following the Dec. 17 vote, Chernomyrdin was unequivocal: "The government intends to continue its economic course," he said in a speech to the parliament's upper chamber.

Subsequently, however, the prime minister said he is ready to work with "the social democratic part" of the Communist Party, and there has been speculation in the press that they might be offered government posts. But a top Communist Party official said last week that any participation in the government would be contingent on "a change of the economic course."

According to Vladimir Mau, deputy director of Gaidar's Institute for the Economy in Transition, President Boris Yeltsin is unlikely to acede to such demands.

"He now has two options," he said. "One is to encourage the reformers and try to strongly consolidate the reforms. The other way is the way of coalition government: I was talking to [Yeltsin political adviser Georgy] Satarov and [Yeltsin economic adviser Alexander] Livshits the other day, and Satarov has the idea of a coalition government.

"But I believe that is extremely dangerous for the president, because the Russian economy is doomed to improve, at least in the next half year. A coalition government will mean that all the improvements will be perceived by the general public as the result of Communist participation in the government, while all the difficulties will be seen as caused by Chernomyrdin and the current economic team. But I have the feeling that Yeltsin is going to stick to encouraging reform."

Mau is not alone in expecting good things for the economy this year. The Organization for Economic Cooperation and Development recently predicted that Russia's recession (its gross domestic product dropped by 15 percent in 1994, 4 percent this past year) will not only bottom out in 1996, but that the country will experience 2 percent growth. The OECD said that inflation in 1996 will be 60 percent (it was 140 percent last year, 226 percent in 1994).

The Economics Ministry, for its part, last week released a forecast for 1996 which includes two possible scenarios -- one optimistic, the other slightly less so. According the first prognosis, the average monthly inflation rate this year will be 1.9 percent: 3 to 4 percent in the first quarter, 1.8 to 2 percent in the second, and 0.8 to 1 percent in the last half of the year. The GDP will cease to decline. The less bullish scenario foresees an average monthly inflation rate of 3.5 percent, and a 3 percent drop in GDP.

There are, not surprisingly, bears among the experts. Andrei Illarionov, previously Chernomyrdin's economic adviser and currently director of the Institute for Economic Analysis, predicted in Kommersant Daily last week that monthly inflation in 1996 will range from 3 to 10 percent, with the yearly rate reaching 60 to 80 percent. Production, he wrote, will remain stagnant or drop by a few percentage points. "Of course, there will not be hyperinflation in Russia, there will not be a catastrophic fall in production or the standard of living, there will not be 'Black Tuesdays,'" wrote Illarionov, referring to the precipitous one-day drop in the ruble's value in October 1994, "... but there will not be economic growth, there will not be financial and economic stabilization. In general, there will be stagnation, similar to what we had during the 20 Brezhnev years."

However Russia's economy performs, analysts say the government could not abandon its current course even if it wanted to. It is, in essence, locked in: The 1996 budget, passed by the parliament just before last month's elections, envisages a 1.9 percent average monthly inflation rate, and international lending institutions will be watching closely to see whether its parameters are followed.

The IMF, which has been releasing a $6.5 billion loan in monthly installments, is considering a further $9 billion three-year credit, and such assistance has become crucial to Russia's economic stabilization program. Mikhail Delyagin, head of the economic problems group of the president's analytical directorate, money from the IMF and other international lenders financed 37 percent of Russia's budget deficit during the first nine months of last year, up from 8 percent for all of 1994.


Timing is everything, and the problem with the optimistic forecasts for Russia's economy is that the improvements, if they indeed materialize, may not be felt by the bulk of the electorate during the first part of the year -- that is, during the run-up to June's presidential vote. And there is an inevitable downside to the government's fiscal and monetary conservatism: According to the Economic Ministry's forecasts, unemployment in 1996 may increase by 50 percent.

Nina Oding, an expert with the International Center for Socio-Economic Research in St. Petersburg, said in an interview with Kapital that unemployment this year could hit 10 percent, up from an estimated 7 to 8 percent now.

Thus one of the likely changes in the government's economic policy is an increase in social spending.

Chernomyrdin last week ordered the provision of 250 billion rubles ($54 million) for student stipends. Deputy Prime Minister Anatoly Chubais, who is in charge of overall economic policy, said the government is exploring various methods for compensating people whose savings were gobbled up by inflation during the reform process. "I believe we should start with the least protected social groups with low incomes," Chubais told Interfax.

Socially oriented government spending started even before the elections. At the end of November, for example, the government allocated to the ailing mining industry 500 billion rubles over and above that mandated in the 1995 budget. Chubais simultaneously announced that the government would buy up 1.5 trillion rubles worth of coal.

Also at the end of November, the Central Bank, on Yeltsin's order, bought an unspecified quantity of gold from state reserves in order to pay out November's pensions.

Some fear that these and other social outlays could combine with seasonal factors to make for an unpleasant inflationary surprise in the first half of this year.

Others, however, say that the government has put in place mechanisms -- including the ruble corridor and Treasury bills -- which will mitigate the impact of such spending.

"One can expect changes in social spending; it will probably be increased, with corresponding consequences on the financial market," said Lev Makarevitch, an analyst with the Association of Russian Banks. "There is traditionally in the first month of the year an increase in inflation due to the specifics of Russia -- the end-of-the-year issuing of large sums of cash; the closing of bank balances, when they sell hard currency to close out accounts in rubles. Therefore a large quantity of money -- rubles -- is in circulation and shakes up prices.

"But the government has learned a lot: Over the last year it created a whole system which connects with cash in circulation. Therefore, if it works efficiently, shocks on the financial and credit-money markets may not be large."

Another policy "correction," say analysts, will be a move toward protectionism. Proponents say such a policy will allow the government to get increased revenues from higher import tariffs while simultaneously reducing subsidies to industries hurt by foreign competition.

"The second stage of the economic dynamics of any country is the growth of domestic market-oriented industries," said Sergei Pavlenko of the government's Working Center for Economic Reform. "And this period is very dangerous for local industry, especially under the conditions of open international competition. So the channeling of investment into the domestic market-oriented sector of industry logically needs to be completed with some kind of protectionism."

A battle over privatization?

Under Russia's constitution, it takes a two-thirds majority in both houses of parliament to override a presidential veto. Thus, even if opponents of economic reform are able to muster a majority in the lower house on key economic issues, they will be unable to force a change in the direction of government policy.

But the Communists and their allies are likely to use the parliament as a propaganda forum, taking aim at areas where the government is vulnerable.

A prime target, say analysts, is privatization. The Italian company STET's withdrawal last week of its offer to buy a 25 percent share of Svayazinvest, the Russian telecommunication holding company, has blown a large hole in the privatization program's fiscal goals. Added to this are the scandals which surrounded the government's loans-for-shares scheme late last year. Reformers and oppositionists alike have attacked the scheme for being collusive and corrupt -- a division of spoils between the government and several politically connected banks.

Critics of privatization can be found even inside the government: Both Deputy Prime Minister Oleg Soskovets and Prosecutor General Yury Skuratov have recently spoken out against the program's "criminal" aspects.

"There is a general recognition that privatization is not going well," said Sergei Markov, a political analyst at the Moscow center of the Carnegie Endowment for Peace. "People are dissatisfied, and anybody running for president is going to have to take this opinion into account ... The opposition will pay the most attention to this question. This will not have immediate consequences, but they will build the legal background for overturning some of the privatizations."

June 1996 and beyond

At the moment, predictions tend to cover only the first half of this year: Analysts, like foreign investors, are waiting to see how the balance of political forces shapes up in the run-up to the presidential elections.

Some, however, have ventured forth with long-range forecasts. While Communist Party leader Gennady Zyuganov has promised that there will be no return to the past if the Communists regain power, and has even courted the American Chamber of Commerce in Russia, Gaidar has more than once warned of economic catastrophe if the Communists were to reoccupy the Kremlin.

Gaidar predicted that, once in power, the Communists would rev up the ruble printing presses to pay off their constituents -- pensioners, the army, the military-industrial complex, the collective farms -- and inflation would skyrocket. In response to the inevitable massive flight from the ruble into hard currency, the new government would institute a fixed exchange rate and other controls, leading ultimately to the empty shelves and queues of yesteryear.

Others doubt that any government would make radical changes in economic policy. "People and enterprises will quickly get tired of living with a depreciating ruble," said the analyst Oding. "The scope for decisions that can be taken in macroeconomic policy is quite narrow. It is too wasteful for a government to conduct communist experiments."

Still others, however, say that the trajectory of Russian economic policy is toward monopolism and an expanded state role, and that this trend will continue regardless of who occupies the Kremlin.

"The country has already chosen its model of development -- it is close to the pre-reform Latin American economies," wrote Andrei Illarionov in Commersant Daily. "It will be a highly monopolized economy with large and, as a rule, incompetent state interference. Gigantic financial-industrial groups will be formed, which will tear up the remaining national wealth ... The strength of these groups will be defined not by their competitiveness, but by their proximity to the state." By the year 2000, Illarionov predicted, Russia's economy will resemble that of Argentina during the rule of Juan Peron.

Others, while less categorical than Illarionov, agree that there is a trend toward a kind of state capitalism. "Things are moving in this direction," said Carnegie's Markov. "But it's not consolidated yet."