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. Last Updated: 07/27/2016

Cabinet Calls Off Budget Talks Amid Debate




The Finance Ministry said Monday at least 31.9 billion rubles ($1.8 billion) in emissionary Central Bank loans would be necessary to finance Russia's 1999 budget deficit.


The announcement came as the Cabinet canceled the scheduled discussion of next year's draft budget amid signs of growing uncertainty over the basic guidelines of the plan. Finance Ministry officials suggested an even bigger amount of emissionary financing might be needed now that the government has approved a plan to reduce value-added tax to 14 percent from the current 20 percent.


Finance Minister MIkhail Zadornov said Monday, however, that he had persuaded Prime Minister Yevgeny Primakov to consider a smaller cut, to 15 percent, since the government endorsed the plan Friday.


First Deputy Prime Minister Yury Maslyukov said the Finance Ministry's draft budget will be considered Dec. 10, after all the tax changes are factored in.


Zadornov has been the main critic of the proposed tax reductions, but on Monday one of Primakov's deputies, Vladimir Gustov, also criticized them, saying they reduced tax revenues by 15 percent and made it hard to raise the minuscule salaries of Russian servicemen.


The Finance Ministry on Monday published outdated basic parameters of the draft budget, which did not include the tax changes. According to the ministry, the 1999 federal budget would have revenues of 482.9 billion rubles ($27 billion), expenditure of 587.4 billion rubles, and a deficit of 104.5 billion rubles, or 2.75 percent of gross domestic product.


Annual inflation was projected at approximately 30 percent, and the average exchange rate for 1999 was estimated at 21.5 rubles to the dollar.


The revenue figure and the deficit may have to change because of the tax reductions.


According to the ministry's spreadsheet, 55 billion rubles for deficit coverage would come from foreign loans, domestic investors would have to come up with 17.6 billion rubles, and the Central Bank would lend the remaining 31.8 billion rubles.


None of the three main sources of deficit coverage seemed certain Monday.


Primakov's press service said he was scheduled to meet the International Monetary Fund's managing director, Michel Camdessus, on Tuesday to discuss the possibility of more IMF loans. Zadornov said Russia would need at least another $10.3 billion from the fund, as well as a recommendation to other foreign lenders to trust Russia. But Camdessus is expected to respond by questioning the reasons behind the planned tax reductions.


Credits from the Central Bank are also far from being decided. One problem is that it is illegal for the bank to lend to the government directly, and lifting the ban would need the approval of both houses of parliament, as well as the president.


The Finance Ministry is proposing a shortcut in the form of a bond issue that the Central Bank would buy. According to Anton Siluanov, head of the ministry's macroeconomic policy department, such bonds would offer the bank 2 percent annual interest with repayments starting in 2013.


Even now, however, the Central Bank is resisting a government bond offering that carries slightly better terms.


"The government is considering selling bonds with 5 percent interest with repayment due in 2013 to cover the deficit in the fourth quarter of this year," Siluanov said in a telephone interview. "This plan has been discussed with the Central Bank. The bank objects."


Peter Westin of the Russian European Center for Economic Policy said the plan was fraught with high levels of inflation. "It's a question of how much they would print," the economist said. "The Central Bank has been really conservative on the issue. But if it is forced to print 30 billion that would be a 16 percent increase in base money and that could result in an inflationary hike of over 25 percent within four months."


The third source of deficit financing - domestic investment - is comprised mostly of privatization returns, projected at 15 billion rubles. Two of the biggest sell-offs likely to take place next year include tenders for 25 percent of the national telecommunications holding Svyazinvest and 70 percent of the oil holding Rosneft. Both auctions were scheduled for this year but then put off for lack of bids.


Apart from the sell-offs, the finance ministry also intends to offer domestic investors a total of 17.9 billion rubles worth of new securities in the second half of 1999, Siluanov said. He said the planned issue was small enough to stand a chance of being sold.