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. Last Updated: 07/27/2016

INSIDE RUSSIA: Budget Is Only Tough While Patience Lasts




Last week the government presented its 1999 budget to the State Duma for approval. Not one to suffer from excessive modesty, it described the budget as "honest" and "tough."


The budget fulfills two of the left's secret dreams: First, the national tax burden is reduced (at least by 60 billion rubles). Second, expenditure is increased. The salaries of state workers and military personnel, for example, have been increased by 50 percent and over.


A reduction of tax revenues and greater spending are certainly contradictory moves, and may well set some fault-finders from outside, say delegations from the International Monetary Fund, to thinking that the money for this expenditure will simply be printed. But they are in for a surprise when they examine the text of the draft budget, since the anticipated emission of money is 20 billion rubles, less than Prime Minister Yevgeny Primakov's government has printed in the last quarter of 1998. The government's apparent slight of hand over the budget is enviable: Payments to the budget are less and payments from the budget are more, and there will be no huge ruble emission.


However, the matter rests in the hands of those same fault-finders from the IMF, or to be exact, depends on the $7.5 billion IMF loan that has already been calculated into the budget and the 9.5 billion earmarked in the budget for payment of foreign debts.


In the coming year Russia must pay off debts of $17.5 billion. The $9.5 compromise payment will only be made if the country can come to an agreement with creditors to this effect, and this will only be possible if the IMF wants to play ball. But the IMF may have doubts as to the realistic prospects of the budget and may decide that it is actually based on an unlimited emission of lies and nonsense.


Russia has been allowed to get away with too much in the past. First, it was allowed year after year to shirk its obligations to the IMF, then to announce a moratorium on payments of debts, while its banks went ahead and moved their assets to Cyprus and the Seychelles. Then, Finance Minister Mikhail Zadornov was permitted to negotiate the restructuring of Russia's debt with Western banks, introducing terms that may be favorable to Russia for a couple of years but which will then insure that investors will not put money into the country for all the tea in China.


The tragedy is that sooner or later the Western financial institutions will lose patience. If the IMF says "don't believe you" about the budget, then the budget loses not only the anticipated $7.5 billion in loans, but will theoretically have to find an additional $8 billion to make payment of Russia's entire, unrestructured, foreign debt - money that it would naturally rather not have to pay next year.


Multiply this shortfall of $15.5 billion by 21 rubles (the ruble to dollar rate indicated in the budget for next year) and you get at least 325 billion rubles, well over half of the total budget.


This is the minimum size of the hole that will open up in the budget if the West decides to call a spade a spade, and nonsense nonsense. And there will be nothing that can be used to stop this hole, except 325 billion hastily printed rubles, or Russia's default on its foreign debts.


Yulia Latynina is a staff writer for Expert magazine.