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. Last Updated: 07/27/2016

Livshits: Election Freezing Economy

Russia's economy is grinding to a virtual halt as regional authorities await the outcome of the presidential election, while the government faces furious demands from local managers to turn on the Central Bank printing presses, the president's top economics adviser said Friday.

"The inflationary pressure on the government is of monstrous proportions," Alexander Livshits, President Boris Yeltsin's top economic adviser, told journalists in an unusually frank and informal briefing for a government official.

"Everyone [in the regions] is just waiting for the government to bend over backward and give them the money," he said, adding that in several regions production output and tax collection are at a "standstill" as local governments adopted a "wait-and-see" policy toward Yeltsin's regime in Moscow.

Livshits said Russia's tough monetary policy was coming under serious threat from the temptation to revert to inflationary measures to plug the holes in the budget overburdened by Yeltsin's pre-election spending promises.

"I would not characterize the situation as a total catastrophe. But it is a fact that we have reached the limit regarding the continuity of our policy," he said. "We're clinging to the last limit."

But Livshits said the strict terms of the three-year, $10 that it will happen at the right time," he said.

Independent analysts have agreed with Livshits' assessment that the Russian economy is facing a moment of truth, but many are at odds over the appropriate remedy.

"To reach this goal -- low inflation -- they have ruined industry, agriculture and the budget itself in the last four years," said Stanislav Assekritov, deputy head of the Reforma economic research center. "The issue of new money is vital."

But Vladimir Mau, deputy head of Yegor Gaidar's Institute for the Economy in Transition, said the government's tight monetary policies had greatly improved the economy in the last two years, even though they now are an easy punching bag for the opposition.

Regional authorities "are just waiting for a new regime to write off all the debts," he said.

Livshits said the campaign to pay off wage arrears -- about 23.5 trillion rubles (about $500 million) had caused severe cuts in other budget expenditures, but surprisingly few ill effects. "This is a very interesting lesson before the budget session for 1997," he said.

The wage-payment campaign breathed life even into the Federal Labor Inspectorate, a government agency monitoring wage payments that "no one even suspected two months ago existed," Livshits said. He added that a total of 1.2 trillion rubles was paid after the inspectorate's investigations, which so far have resulted in 55 criminal cases for failure to pay wages.

Finance Minister Vladimir Panskov, in an interview with Kommersant weekly magazine this week, said the back pay had been retired at the expense of items such as capital investment, agricultural subsidies and supplies for Russia's Far North. He added that if the efforts were seen as unsuccessful, he could be made a political sacrifice.

"I am perfectly aware that in the tough pre-election race I could be chosen as a scapegoat," Panskov said.

Political uncertainty has partly foiled the government's plans to finance the growing budget deficit through placement of state securities abroad, Livshits said. Yields on T-bills, known by their Russian acronyms GKOs and OFZs, soared last month as the government increased the volume of trade to compensate for tax collection, which fell to less than half of projections.

"We have failed to reduce the yields on the GKO market to drive the banks away from it like we drove them away from the currency market," Livshits said. The adviser ruled out the possibility of tough customs rules for some 10 million Russian shuttle traders who flood the country each year with cheap imports worth 50 trillion rubles.

"The president has prohibited such experiments on millions of people," he said.

Livshits was asked why Russia failed to attract as much foreign investment as China, which Yeltsin is scheduled to visit later this month. Livshits had a simple answer.

"Would you like to live in China? No. Neither would I."

The adviser also said that loyalty among state officials has suffered in the face of a possible Communist victory in June, as a "certain disorganization in the government" became evident.

"One could expect this to happen because no one knows who will win and many are trying to find an excuse for them and their behavior at a crucial time in order to preserve their positions," he said.