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. Last Updated: 07/27/2016

Governing by Default

After the presidential elections, the Russian government had a strong political mandate to remove many remaining economic obstacles and pave the way for growth. Unfortunately, little has been done. Soon, three months will have passed since Viktor Chernomyrdin was elected prime minister by an overwhelming majority of the Duma. The last time Chernomyrdin enjoyed such enormous powers was in 1994. Then, the government stayed too passive until the exchange rate collapsed on what is now known as Black Tuesday.


1996 is about to become as much of a lost year for economic reform as 1994 was. Today, the apparent stumbling-block is tax collection, but the real issue is Chernomyrdin's ability to rule. He faces going down in history as the prime minister under whom others undertook important reforms, when he was too weak to stop them.


The government has undertaken many necessary measures, such as revoking the excessive promises made during the presidential campaign and sequestering expenditures as tax revenues fall short of targets. It has also stopped net borrowing through the sales of treasury bills, bringing down their interest rate to about 50 percent per year. But this is far from enough.


The government commitment to keep inflation down seems firm and credible. But it is forecasting 1 percent growth this year, while the outcome may be a fall of 5 percent. The anticipated inflow of capital after the elections has not occurred. The main reasons for the continued decline has been extremely high interest rates. Without substantial structural reforms, however, Russia is not likely to return to economic growth.


The structural problems start with the very organization of the government, which still has a Soviet structure with about 65 ministries and state committees. As before, branch ministers are in majority in the government. Nothing but his own lack of will stopped Chernomyrdin from abolishing the many branch ministries when he appointed his new government in August.


Similarly, the prime minister had a fairly free hand in appointing his ministers, and he should be judged by his pick. He selected formally competent but gray civil servants of his own age rather than politicians or policy-makers. Boldness and determination have been carefully avoided. His cabinet looks like a European government early in this century before democratization.


Chernomyrdin seems to want a weak government to be able to dominate it. Both he and his cabinet appear to lack ideology, strategy, program, and political will. They are neither for nor against reform but are just for the status quo. Most West European governments are hardly better, but Russia cannot yet afford such complacency.


The government's frailty is swiftly being exposed. The tax decrees of Aug. 18 essentially stated that taxes should be paid, and with interest. The bankers protested against being taxed, and they won because of a lack of coordination within the government. Russia's tax-paying enterprises drew the plausible conclusion that this government is not serious about collecting taxes, and tax revenues fell drastically in September. Tax revenues were low in April and May because of the presidential elections, but rose swiftly from June through August. In September, however, the new government lost its credibility. The current tax collection storming will hardly bring it back.


Throughout the CIS, tax revenues have gradually fallen regardless of the tax system. Rather than trying to collect over 30 percent of GDP in tax revenues, the Russian government should be satisfied with 25 percent, which is more than most CIS states gather. Excessive endeavors to raise more revenues may stifle the economy. The flaws of Russia's tax system are fundamental and well known. Tax reform is needed sooner than 1998.


The Achilles' heel of Russia's financial system is the Finance Ministry. The persistent overestimation of plausible revenues must end and the budget must be realistic, so that arbitrary sequestration ceases. The creation of an extraordinary tax commission is nothing but a recognition that neither the ministry nor the government do their jobs.


Even with financial stability and an orderly tax system, growth is not assured. Unlike Central Europe, Russia has not seen many new private enterprises emerging as regulations block their development. While Poland has more than 2 million private enterprises outside of agriculture, Russia has only 900,000, and that number even fell last year.


One explanation is that Russia has a very poor ranking in all indices comparing the degree of deregulation in various countries. The market has not been given the freedom it needs. A thorough revision of old and new legislation and a great deal of liberalization are urgently needed.


The pension system and the rest of the social safety net are also in bad shape, giving too little to those in greatest need, while costing too much, as benefits are spread to those who do not need them. Fortunately for Russia, the government is bound by a three-year agreement with the International Monetary Fund. Since Russia is not pursuing a plausible policy to collect taxes, the IMF has halted its monthly disbursements. This is a serious warning from the international financial community.


It is still possible to undertake a fundamental government reform and make some of Russia's many strong economic reformers ministers. If one of them ran Russia's finances, taxes would be collected and wages and pensions paid.


Russia needs to undertake many reforms, and it can ill afford such a passive government. Yet, the economic hazards should not be exaggerated. The problems and remedies are well known. The key issue is political will. The current malaise in Moscow's economic policy community is discomforting.





Anders ?slund is a senior associate at the Carnegie Endowment for International Peace and a former adviser to the Russian government. He contributed this comment to The Moscow Times.