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. Last Updated: 07/27/2016

Duma Taps Bank For Budget Crisis

The government and the State Duma challenged Russia's independent Central Bank and its tight monetary policy Wednesday, threatening to raid trillions of rubles from the bank's coffers to boost the cash-strapped federal budget.

In a rare partnership, the communist-dominated State Duma passed a bill proposed by the government that would require the Central Bank to earmark 5 trillion rubles (about $1 billion) of its strategic reserves to the federal budget.

In the lead-up to the elections, the money has been targeted to politically popular spending such as payment of wages, the Far North and the military-industrial complex.

But the measure drew a swift response from the Central Bank, which interpreted the move as a challenge to its legal independence and as a threat to financial stabilization.

Central Bank first deputy chairman Sergei Aleksashenko warned the Duma that the decision could lead to another "Black Tuesday," referring to a banking crisis in October 1994 when, overnight, the ruble lost a quarter of its value against the dollar.

"This money does not in fact exist. The whole 5 trillion rubles is just an unsecured issue. This money is not backed by anything," Aleksashenko was quoted by Reuters as saying.

Aleksashenko told the Duma that the Central Bank would appeal the law in the Constitutional Court, if it gets through the Federation Council and is signed into law by President Yeltsin. The Central Bank's independence is guaranteed by a law passed by the last Duma.

In fact, Yeltsin has already given his backing to the idea, signing a decree two weeks ago that recommended that the Central Bank transfer 5 trillion rubles out of its 1994 profit of 8.6 trillion rubles for the needs of the federal budget.

Central Bank profits come from investments of the bank's reserves into securities of Western governments, as well as from operations on domestic market. The bank's reserves are generally used not for budget spending but to protect the Russian banking system and guarantee private depositors in commercial banks.

However, the Central Bank's objections to the raid on its profits were ignored, and the Communist Party, pro-govern Finance Minister Vladimir Panskov told Reuters, "This does amount to an emission of money, but it isn't that big, and it won't affect the market at all."

However, one Western economist who asked not to be identified said that the government's decision to rely on "unconventional sources of financing the budget," namely raiding the Central Bank's profits, could get a cold welcome from international financial organizations such as the International Monetary Fund.

"[The independence of the Central Bank] has been one of the hallmarks of this current economic program that's been supported by the IMF, so that's a very important principle," the economist said.

Under a three-year $10.1 billion loan approved by the IMF in April, Russia is expected to follow a strict fiscal and monetary program that is subject to monthly reviews by an IMF monitoring team before each disbursement. The IMF team is expected to arrive in Moscow next Monday for a regular assessment.

The economist said that, if the bill becomes effective, the increase in money supply would send inflation spinning unless "some offsetting measures are taken," adding Russia lacked clear rules on "how the transfer of Central Bank's profits is going to be made."

At a press conference Wednesday, Economics Minister Yasin said the government was making good progress on lowering inflation but it faced a desperate situation holding to its budget.

Yasin said that tax collection has come to a standstill in recent weeks as firms hold their breath in the lead-up to the June 16 election. "There is widespread expectation of a tax amnesty, and rumors are circulating. And there is uncertainty as to who will win," Yasin said. The halt in tax payments by businesses, he said, occurred "either because they're afraid the communists will win or because they hope the communists will come to power."

Yasin said the government was "demoralized by the upcoming elections" and has "lost its ability to press" tax dodgers to ensure a steady flow of cash into the state coffers.

Tax arrears for the first four months of this year reached about 60 trillion rubles, while the budget deficit in April alone exceeded 10 trillion rubles, he said.

He said, however, that inflation had come down to 1.6 percent in May or only 28 percent on an annual basis, compared to 231 percent last year. The Economics Ministry also projected Wednesday that GDP, which has dropped by 3 percent in the first four months of this year, will average about 2 to 3 percent down for the year as a whole.

Andrei Arofikin, an analyst at CS First Boston, said the government was looking for other ways to finance the budget deficit -- currently at 4.3 percent of the GDP because borrowing has become increasingly expensive. Government T-bill yields have recently surged to between 170 percent and 180 percent.

"Obviously, there's interest on the government side to get the cost of borrowing down as much as they can to bring down these astronomically high interest rates," Arofikin said.