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. Last Updated: 07/27/2016

Cabinet Starts Work To Revive Economy

Taking President Boris Yeltsin's mandate to heart, Russia's fledgling government launched into its economic duties Thursday by announcing a plan to avert financial crisis and promote growth through 2001.

The Finance Ministry presented a frugal three-year spending plan that drew praise from economists, while Prime Minister Sergei Kiriyenko promised that the country will live within its means and drastically cut its debts.

"If we cannot solve the problem of government debt servicing within the next two to three years, it will be a major blow to the defense capabilities and economic security of the country," Kiriyenko was quoted by Itar-Tass as saying in a Cabinet session. "It is essential to use a pessimistic forecast for the country's economic development, and then if new sources of revenue appear, to adjust the budget accordingly."

Yeltsin sacked Russia's previous government, run by former Prime Minister Viktor Chernomyrdin, for failing to right Russia's economy and ensure prompt payment of state-sector wages. Kiriyenko's prime task is to restore faith in economic reforms by bringing Russia's finances under control.

Yeltsin said Thursday that all citizens must understand the nation's budgetary limitations.

"Unfortunately, there is a hole in the budget," the president was reported as saying by Interfax before the start of a Victory Day concert at the State Kremlin Palace. "We should realistically determine [the gap] and say what we will not be able to manage, so that the people will not be deceived."

Reducing the nation's debt is a key step toward recovery. Russia's borrowing has risen to dangerous levels as the nation struggles to meet budget obligations in the face of meager tax collection. Servicing the debt eats up budget revenues and makes the country more vulnerable to international financial shocks, such as the Asian crisis.

Central Bank Chairman Sergei Dubinin warned the government Thursday that a financial crisis will ensue if Russia doesn't get a handle on its debt. According to Interfax, he recommended restructuring the country's foreign debt by paying it off with cheaper long-term credits. A Finance Ministry report presented at the Cabinet session Thursday said that by 2001 the cost of servicing foreign debt alone will exceed 12 percent of budget spending, compared with 8.4 percent this year.

Russia's foreign debt reached $123.5 billion at the end of last year, while domestic debt, primarily in government treasury bills, amounted to 568 billion rubles ($95 billion). Servicing the debt this year will cost roughly 152 billion rubles, or about 5 percent of gross domestic product.

The government's three-year plan calls for a reduction in debt servicing as a percentage of total spending, and a reduction in spending as a percentage of GDP. The plan predicts annual economic growth of five percent by 2001, compared to 0.4 percent last year. Inflation is forecast to drop to between 3.7 percent and 4.5 percent, compared to 12 percent last year.

Kiriyenko's government set a spending target of 318.3 billion rubles in 1999, up slightly from the 300 billion rubles earmarked for 1998. Spending is projected to grow to 348.1 billion rubles in 2000 and 376.3 billion in 2001. The targets assume little improvement in tax collection, a faulty piece of the economic pie that Russia must improve to convince investors of its stability.

Economists welcomed the plan, calling it a responsible road map to growth.

"If the government keeps spending under control it can service its debt and restore confidence to investors," said Alexander Morozov, an economist with the World Bank in Moscow. "This would lead to a decrease in interest rates, greater profitability of investment in the real sector and greater economic control."

Morozov said the World Bank had urged Russia to chart a long-term spending plan as a way to keep debt spending under control.

"If you look one year ahead, you will not see what is required to pay for the servicing of state debt," he said. "To be in good shape in three to five years the state budget has to make adjustments right now."

Deputy Finance Minister Vladimir Petrov on Thursday said Russia's borrowing from the International Monetary Fund will end in 2000, when the current $10.2 billion, four-year loan expires.

"Starting in 2000 we will conclude our relations with the IMF on terms of creditor and borrower," Petrov said.

An IMF mission will return to Moscow this month to monitor the country's financial situation and decide on the disbursement of another $700 million tranche of the loan. Petrov expressed confidence that the tranche would be dispersed.

Also, in a sign that the new government intends to further liberalize the economy, a top privatization official announced Thursday that Russia had drafted a plan to slash by two-thirds the number of "strategic" enterprises in which it will keep a stake, from about 3,000 to 800.

"Practice has shown the government is not capable of effectively managing such a number of companies," Alexander Braverman, deputy minister of state property, was reported as saying by Interfax.

Companies retaining government ownership will be more closely monitored to ensure they don't rack up debts to the federal budget or pension fund, Braverman said. Yeltsin is expected to sign the decree in June.