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. Last Updated: 07/27/2016

Experts: Yeltsin's Payment Vow May Fuel Inflation

With a series of spending pledges last week, President Boris Yeltsin signaled his intention to boost his re-election hopes by raiding the federal treasury, experts said Monday.


Yeltsin announced measures on back wages, reconstructing Chechnya, student grants and pension funds that economists said would add, if fully implemented, at least $12 billion to government spending in 1996 -- more than 12 percent of the draft budget approved by the State Duma last December.


Analysts warned that Yeltsin's moves could destabilize the economy and send inflation -- which declined steadily last year and hit a post-reform low of 3.2 percent in December -- shooting back up.


"Post-election politics has its own economic cost," said Yaroslav Lissovolik, an economic expert with the Russian-European Center for Economic Policy, referring to the Communist triumph in the Dec. 17 parliamentary polls. "The rise in expenditure is likely to put very high pressure on the budget.


"Now the government is in a rather weak bargaining situation because of the upcoming [presidential] elections. Regions are already pressuring the government for more subsidies," he said.


With miners, teachers and other workers all clamoring for wage arrears from the government, the State Statistics Committee announced Monday that back pay claims last year jumped 219 percent to a total of 13.38 trillion rubles ($2.8 billion) by the end of 1995. That figure far outstripped the annual inflation figure of 131 percent, Interfax said.


Satisfying wage demands appeared the intent behind Yeltsin's promise Friday to create a special presidential fund with "a month's wages for everyone in Russia." He did not specify where the money would be found for the fund, which economists estimated would have an annual cost for federal employees of some 30 trillion to 50 trillion rubles ($6.4 billion to $10.6 billion).


Also last week, Yeltsin signed an extrabudgetary decree allocating 16.2 trillion rubles ($3.4 billion) and $1 billion in foreign credits for the restoration of the Chechen economy. Another decree boosted budgeted student grants 20 percent from April 1, a move Interfax said would cost $63 million, while an acceleration of pension payments would add $2.4 billion in total spending.


"When the parliament was discussing the budget and we wanted to increase the pensions and spending on social spheres, [the government] called us inflationary," said Duma deputy Oksana Dmitriyeva, head of the lower house's subcommittee on budget systems and extrabudgetary funds.


"Now that the presidential election campaign began, everything became possible."


Richard Layard of the London School of Economics, an adviser to the Russian government, said the decrees in and of themselves would not throw the fragile Russian economy out of whack.


"It's just a method of making sure that there's some money to pay wages," he said. "It's only when it's spent that you have a problem."


For the government officials responsible for implementing such measures, however, the challenge was daunting.


"It is certainly quite a big sum. But if the president signed such a decree, then we'll need to find a way to locate this money," said Yury Petrov, head of the finance department in the Economics Ministry.


Petrov said funds would probably come from cutting other expenditures in the budget, or using the money initially allocated for federal investment programs. He also said extra money could come from new levies on alcohol and tobacco products. (Story, Page IV.)


About 90 percent of the pensions increase will come from the state pension fund rather than the federal budget, Interfax said. But Tatyana Chernova, deputy head of social security at the Finance Ministry, cautioned that the pension fund was unstable because of frequent delays in payments by enterprises and said the 1996 pension fund budget had not yet been set.


Lissovolik said the government's room for budgetary maneuver was limited. "Every rise in expenditure will be hard to finance," he said. "You have already a high projection for tax collection, so it's hard to expand that. You have high privatization proceeds which are considered widely to be unrealistic. You have problems financing the deficit with GKOs and T-bills because the yields are so high."


Maarten Pronk, general manager of ING Bank in Moscow, said it was "too early to tell" whether Yeltsin's moves last week would amount to an abandonment of economic reform. But he said attention to the social sphere would have its limits. "If they would pay all sectors of the Russian economy which are owed [back wages], that would make the whole inflation containment policy go down the drain," he said.


The government is likely to get some room for maneuvering through its assumption in the budget of a 1.9 percent monthly inflation rate. The actual figure is expected to be at least 4 percent in the first part of the year, meaning that the government's nominal revenues will increase.


But that would cut both ways, Lissovolik said. "Of course, you have revenues expanding, but the result is underfinancing of other spheres in real terms and overall decline of stability."


The government's first attempts to buy off social protests have met with little success. The Russian miners' union last week rejected an offer of 600 billion rubles in back pay and 10.4 trillion rubles of investment in the coal industry as too little, too late, and set an indefinite nationwide strike to begin Thursday.


Teachers were promised Sunday that their back wages would be paid, but are planning a three-day strike beginning Tuesday.