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. Last Updated: 07/27/2016

Premier Floats Plan To Avert Fiscal Crisis

With the euphoria of the elections quickly receding, Prime Minister Viktor Chernomyrdin said Friday the government would have to take urgent measures to raise tax collection and avoid a budget crisis.


Chernomyrdin sketched out his plan for fixing gaping holes in the budget at his first cabinet meeting after the election, moving quickly to head off fears that after six months of free-spending election promises and government inaction, the economy is out of control.


Economists have been warning that despite progress on stabilizing inflation in the first half of the year, Russia's budget deficit has been growing and tax collection has collapsed. They have raised the specter that Russia could face an inflationary surge in the fall, threatening a crucial $10-billion loan deal with the International Monetary Fund.


Chernomyrdin, who is expected to be re-appointed prime minister in charge of a new government team, responded Friday, saying that improving tax collection and curbing costly tax exemptions were crucial to prevent a looming budget crisis.


Chernomyrdin said total and noncash payments," said Chernomyrdin.


The government would also seek to raise money by borrowing internationally, issuing Eurobonds, he said.


The proposed measures would include a 30-point program to impose severe fines on overdue tax payments and state administration on enterprises that failed to come up with the money, said Joachim Wermuth, a Western expert with the Russian Finance Ministry.


Wermuth said the government also planned tighter controls on energy exports and payment of alcohol excise duties, Reuters reported.


Chernomyrdin also announced new taxation rules for Russia's vast army of chelnoki, or shuttle traders, but he said the measures would aim to sort out the flow of goods rather than restrain it. Shuttle traders accounted for nearly a quarter of overall Russian imports in 1995, worth over $10 billion, according to the Statistics Committee.


Thomas Wolf, head of the IMF mission in Moscow, also spoke out on the need for quick changes to the budget Friday, saying the government would need to "address the budget situation with a view to raising revenues as soon as possible and ensuring the expenditure program is consistent with overall budget goals," Reuters reported.


In a move that was widely seen as implicit backing for President Boris Yeltsin, the IMF had turned a blind eye during the election campaign to signs that the government was falling behind on tight budget and monetary targets which the IMF had set as conditions for a $10-billion loan.


Andrei Illarionov, director of the Economic Analysis Institute, said last month the consolidated budget deficit in April reached 11.8 percent of the gross domestic product, well up from 3.85 percent projected in the 1995 budget.


The strains on the budget boiled to the surface when the government pressured the Central Bank into transferring 5 trillion rubles of its profits into the federal budget to pay out wages in June.


Economists were divided Friday, however, in their assessments of the gravity of the looming crisis and of how the IMF would respond now that the elections are over and its hands are untied.


Mikhail Delyagin, an economic expert at the analytical center under President Yeltsin, admitted the government would find it difficult to keep to the IMF's loan conditions, but he believed the IMF would do little about it.


"The fiscal policy will become more lax, but it won't cause a conflict with the IMF, just like IMF did not reprove the printing of money by the Central Bank," Delyagin said.


"I don't know what type of consultations they will have, but I'm sure that they are normal people in the IMF and they will find a common solution," Delyagin said.


However, Pavel Teplukhin, chief economist at Troika-Dialog investment bank, said the IMF would not keep "turning a blind eye" to irregularities in the Russian economy, as it may have done during Yeltsin's election campaign.


"It's likely there won't be any concessions made by the IMF anymore and they will demand from the government strict adherence to the agreed parameters," said Teplukhin.


Economists said a burst of post-election investor confidence is one likely source of headaches for the government, because pressure is likely to grow for the ruble to rise in value.


Delyagin said that with dollars flooding onto the foreign exchange market, the government would be forced to print rubles to keep the currency from appreciating. Otherwise, it would risk a jump in the ruble exchange rate that would be damaging to exporters.


This would, however, involve an increase in the ruble money supply that Delyagin said would require "amending our relations with the IMF."


Teplukhin, however, said that despite the budget crisis, the government would still be able to meet the inflation target as the growth of ruble supply will be compensated by a drop in circulation.


"I think the average monthly inflation in the second half of the year will not get over 1.5 percent," he said. Inflation for June was 1.2 percent.