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. Last Updated: 07/27/2016

New Guard Inherits Old Burden

When I was a child, my parents would sometimes take me to the Lenin Mausoleum on Red Square to watch the changing of the guard. I recall the sense of anticipation when the Spassky Tower clock would strike 12 and the relief, in lockstep, would march forth from the gate.


Those same feelings returned Aug. 14, as news programs flashed hourly reports that the presidential decree containing the names of those who would make up the new government had been signed and was on the verge of being released.


But this is where the similarities end. While a guard's work is always the same, a new government confronts not only a host of new problems but must deal with those it inherits from the outgoing regime. In this case, tax collection.


The issue is quite urgent: Does the Russian government possess the power to fulfill its most basic economic functions, or has it become so weak that the "inflation tax" is the only form of tax collection that works? Indeed, the former government is in part to blame for digging us into this pit. No one considered the consequences when the government, instead of distributing real money, was handing out amnesties on future taxes.


Those amnesties were to last from three to six months. But in the months leading up to the presidential elections, when it came time to start paying, many businesses openly declared that they had not been and were not planning to begin paying taxes because they were out of money. In fact, they continued to do business as usual, and fared quite well, using non-cash payment systems like barter and veksels.


Other measures were taken to overcome the tax-collection crises: An excise tax on vodka was introduced, and a plan was drawn up to tax the activities of shuttle traders. But the final word rests with the new government. Examples from Latin America suggest that if the problem is not solved, the responsibility for making economic policy decisions might pass from the men in suits to those in uniform.


But there is another item for budgetary concern: regional budgets. On one hand, local budgets cannot legally operate at a deficit. On the other, local budgets do go into debt through securities issues and receiving direct bank credits. Getting out of this situation may prove difficult as foolhardy local administrators often consider loans the same as budgetary revenues, meaning that they likely have no plans for future revenues.


In other words, the federal government may find itself facing the prospect of insolvent local administrations in the not-too-distant future. This situation has already begun to appear in those regions where budgets have not found adequate revenues for paying some workers' salaries. Governor Yevgeny Nazdratenko of the Primorsky Krai could not, without the help of the federal government, answer the miners' question, "Where's our money?" Instead of discussing where the money is to come from, the federal government hinted that the time has come for Nazdratenko to step down.


Meanwhile, the Finance Ministry is busy trying to find revenue sources. The euphoria that was felt after the Finance Ministry managed to borrow enough to cover its needs has now worn off and is being replaced by a concern that the domestic GKO market is now exhausted. By the beginning of the summer, yields on government securities had to be held at such high levels that the only businesses that could offer comparable profits were gambling and drugs. As this situation continued over the last year, financial institutions forgot about investing in industry and other sectors of the economy.


And although yields on government securities have decreased significantly in the last month, it seems a final solution will be possible only by attracting foreign investors and selling government securities overseas. The government has already begun to gradually lift limits on foreign participation on local markets. However, issuing securities on the world market is a job that the new government will have to face.


Let us say that the government succeeds in its appointed tasks. Not only that. Let's say the government does its job of structural reform so well that a significant number of inefficient companies are sent bankrupt. The government can expect its reward in the form of mass unemployment.


Unemployment scenarios have been a topic of discussion since the reform process began. As far back as 1992, the World Bank had plans to grant Russia credits for the creation of an unemployment welfare system. It would seem that World Bankers were a little ahead of their time. But their time may be coming: Mines that produce coal that won't burn without adding fuel oil and costs as much as vodka -- which will burn and is better for miners -- will have to be shut down.


And then there is the problem of corruption. Even ever-circulating rumors and newspaper articles seem to avoid the mention of corrupt officials' names, and in the process become cards in the hands of those they ignore. In these circumstances, either the government will have to conduct its own housecleaning or a somewhat informed opposition will have to launch an attack that can pierce through to the existing government. Perhaps Vladimir Potanin, a man of immense wealth who cannot be bought off, will become Russia's Berlusconi.


Mikhail Zadornov's refusal to accept the post of finance minister is just one more symptom of the issue of corruption. One explanation suggests that some of Zadornov's demands relating to the fight against corruption were considered unacceptable. In another version, Zadornov is said to have told his Duma faction's leader, Grigory Yavlinsky, that he simply preferred to remain in the opposition.


Such are the problems awaiting the new government. Those who will participate in it should be allowed to hope for its success, although it will not come easy. I hope that Seaman Zhelesnyak's famous words to the Founding Conference of the Soviet Union in 1917, "The guard has grown weary," will not apply to Chernomyrdin's new team.





Irina Yasina is the director of Agentstvo Praim, a financial information company.