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. Last Updated: 07/27/2016

EDITORIAL: Budget Cuts Must Follow Asian Crisis




After spending $2 billion this month quietly propping up the ruble, the Central Bank has been forced to admit that Russia's economy is once again under threat as a result of the collapse in investor confidence that is spreading here from Asian markets.


To ward off a massive currency devaluation, the Central Bank has hiked interest rates and Russian banks have been discouraged from buying dollars with a tightening of reserve requirements.


While some may mutter darkly about an attack on Russia's currency by speculators, there are plenty of objective reasons for concern about the ruble.


The continuing and deepening crisis in Asia suggests that an end has come to the good times of 1997, when Russia was able to attract a flood of cheap capital. Russia will have to pay dearly if it wants to continue to borrow on world markets over the next year.


Moreover, Russia's trade position looks set for a serious deterioration in 1998 because the crisis in Asia has triggered falls in the world price for crude oil and other raw materials which account for a large share of Russian exports.


The Central Bank's latest short-term measures may stop the run on the ruble but only at a considerable cost. They will squelch any growth in business investment as funds are moved back into the treasury-bill market.


The 1998 budget will likely have to be completely rewritten. With interest rates now well over 40 percent, the government's debt-servicing costs for this year will be much higher than the 16 percent to 18 percent on which the current budget is based.


It looks increasingly likely that the government will have to announce drastic cuts to the 1998 budget to avoid borrowing that Russia cannot afford.


This will be politically unpleasant and provide fuel to opposition in the State Duma. The government can expect little help from the International Monetary Fund which wants to see progress on tax collection and a new tax code.


The government can continue to make rhetorical affirmations that everything is all right, but the Asian crisis has shown that ignoring problems does not make them go away.


A pledge of austerity, both by cutting expenditures and raising taxes, is essential. In this case there is only one man to utter such a pledge. Prime Minister Viktor Chernomyrdin, the man who now holds the real reins of power, must acknowledge the problem and take political responsibility for the tough measures needed to deal with it. Such candor is not in a part of usual style and it will hurt his presidential plans, but it is needed to keep the Russian economy stable.