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. Last Updated: 07/27/2016

Duma Faces Last-Minute Budget Cuts

The biggest surprise in President Boris Yeltsin's state-of-the-nation address was his demand that parliament adopt cost-cutting amendments to the 1998 draft budget, throwing into doubt legislation he has spent months pushing past the State Duma.

The bid to secure last minute changes to the budget may represent a political risk but, if implemented, would represent a revolution in Russian state finances, creating Russia's first realistic budget.

The redrafting of the budget would also be a key element of Russia's battle to weather a financial storm after last year's crash of stock markets and currencies in Asia. Investors have been pulling out of Russian government bonds, selling their rubles and buying dollars.

Yeltsin is to meet this week with International Monetary Fund head Michel Camdessus, who is in Moscow to approve the government's economic program for 1998 and decide on the release of a $670 million tranche of a $10 billion loan. The two could also discuss a new IMF financing program.

In recent weeks, the government has been taking emergency austerity measures to defend the ruble and calm international investors worried about drift in the country's economic policy.

Yeltsin's strong remarks came as the tide was already turning in Russia's favor. The Central Bank, which was forced to raise interest rates three times in the past three months to support the ruble, has been able to reduce rates. Foreign money has been trickling back into government bonds. Analysts say the ruble has already escaped the danger of a devaluation.

"I think the perception had largely changed before [Yeltsin] made the speech," said Kingsmill Bond, head of Russia research for Deutsche Morgan Grenfell in London. "The pressures on the ruble were significantly overstated and I think the market has now recognized that."

The president's speechwriters were clearly aware that the world financial community was listening. They peppered Yeltsin's address with references to just about every key area of reform espoused by first deputy prime ministers Anatoly Chubais and Boris Nemtsov, who are seen in the West as the guarantors of liberal economic policy.

But the crucial issue for markets was the government's commitment to a tight budget. Parliament has traditionally passed budgets that promise more spending than revenues can possibly cover, adding to the problem of non-payments and forcing the government to arbitrarily slash spending.

A realistic 1998 budget was one of Chubais' initiatives last year, but politics and economic events overtook him.

In pushing the budget past a reluctant Duma, Chubais was forced to accept 27 trillion rubles of extra spending backed up by only vague promises of extra revenue. The draft '98 budget might still have been workable, but then the Asian economic crisis hit, forcing up interest rates and increasing the government's debt servicing costs.

Economists were saying the budget could not be made to work and would have to be amended.

In his remarks Tuesday, Yeltsin agreed. "Although the budget is already under discussion, nevertheless it should be made realistic this year by adopting amendments," the president said.

It was not immediately clear, however, how the parliament could make Yeltsin's proposed cost-cutting amendments to the budget. The document is scheduled Wednesday to go through the last of four State Duma readings, during which only minor textual changes can be made.

Duma deputy Alexander Shokhin suggested the government could include a phrase saying 27.9 billion rubles in extra expenditures -- the amount added by the parliament to the government's original budget proposal -- would only be fulfilled if the money was available. Since revenues are highly unlikely to meet the budget's expenditure targets, the change would effectively slash spending.

"If the Duma cooperates with the president and the government, the budget could be passed at the fourth reading," Shokhin said.

Yeltsin attacked a range of other fiscal problems, including the use of monetary surrogates such as promissory notes to pay taxes, irresponsible state spending and, most importantly, delays in implementing much-needed reforms to Russia's tax system. Earlier this month, the government sent parliament a new version of the tax code that would offer lower, simplified rates in return for better payment discipline.

The president urged the Federation Council to pass the new code, which the government hopes to put into effect in 1999.

"Let us agree that it should be adopted this year," he said.

The government's attempts to improve tax collection have been complicated by firms' habits of building up debts to each other and paying in barter. Yeltsin placed responsibility on Chubais to stop the increase of interenterprise debts by the third quarter of this year and achieve a decrease by the end of the year.

"This is an extremely concrete task, though a very complex one," he said. "But Anatoly Borisovich, it is necessary to cope with it, to find possibilities and reserves."

Yeltsin also called on the government to "prepare a federal program to save money" by the end of May. As an example of economizing measures, he praised Nemtsov's program of open tenders for government purchasing, saying the tenders had saved the state more than 3 billion new rubles in 1997.

The markets were expecting Yeltsin to announce a revision of the budget and a renewed commitment to reform, and he seemed to have done what was expected.

"It's a signal that whatever happens inside the government, the economic line is towards reform," said Brigitte Granville, chief economist for Russia at JP Morgan. "Suddenly there is an understanding that it will be a very good thing to have a balanced budget."