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. Last Updated: 07/27/2016

Kiriyenko Seeks Budget Passage as Debts Rise

Russia's acting Prime Minister Sergei Kiriyenko painted a grim picture of the economy and its rising debt at a speech before the lower house of parliament Friday.

In statements made moments before the State Duma rejected his nomination for the permanent post of prime minister, Kiriyenko revealed that foreign debt now stands at $122 billion, and that the country could spend up to 30 percent of the budget this year on debt servicing.

Last year debt payments took 13 percent of the budget.

Kiriyenko urged the government to quickly pass the 1998 federal budget, to improve tax collection and to cut spending, rather than rely on foreign markets to cover budget costs.

"The most important thing is not to mix up ends and means," Reuters quoted Kiriyenko as saying.

He said gross domestic product growth had come to a halt. Russia stands to lose up to 40 billion rubles ($6.7 billion) in 1998, with federal losses of up to 10 billion rubles, he said.

Acting Finance Minister Mikhail Zadornov, speaking on the nighttime interview show "Hero of the Day", confirmed that Kiriyenko's statistics were accurate, though they represented the most pessimistic scenario.

Two factors -- the Asian crisis and depressed world prices for oil and gas -- have forced up the cost of the government's borrowing and pushed the economy into a danger zone.

With the slow growth of the economy, these two factors were enough to cause serious repercussions, Zadornov said.

Kiriyenko also said that domestic debt demands 82 billion rubles and would continue to escalate through the year. He said the government must balance and approve the budget by September to curb the trend.

But Kiriyenko categorically ruled out ruble devaluation, instead saying that increasing revenues and cutting costs were the preferred cures.

Reuters quoted Kiriyenko as saying that Russia could save 100 billion rubles -- one fifth of the 1998 federal budget -- by cutting wasted spending on energy.

While the government continues to incur more debt to pay its expensive bills, investors' interest wanes. Lack of enthusiasm at Wednesday's treasury bill auction drove yields on a 30-month federal loan bond up to 40.24 percent, compared to Tuesday's 36.49 percent.

The government was forced to find $166 million in reserves to cover payment on due bills.

The Organization for Economic Cooperation and Development released a report Wednesday saying foreign debt was the biggest problem facing Russia.

Analysts, however, urged investors not to panic, but did sound a note of caution saying the trend was not a healthy one. They said the government still had few years before the debt reaches crisis proportions.

"The government admitting to problems is a good sign," said Alexander Morozov, an economist with the World Bank. "This should create confidence among investors that the government realizes the need to do something to return to stability."

Strong leadership is necessary to push economic reforms ahead, analysts said. As long as debts increase, more harm will be done to the real economy as investors switch to a high-return T-bill market. Russia could see a return to the summer of 1996 when yields hit 200 percent.

Kiriyenko's failure to secure the prime minister's seat was not the best answer to his warnings, analysts said.

Edwin Dolan, president of the American Institute of Business and Economics, said that "what needs to be fixed quickly is the budget system. It is the root cause of this whole syndrome, as is fixing the tax system and reducing expenditures. But how can you do that without a prime minister?"