FINANCIAL STABILIZATION

Simultaneously with the economy's stabilization the government attempted to achieve financial stabilization as early as the beginning of 1992.

The budget for the first quarter of 1992 was presented to, and "taken note of," by the Russian Federation's Supreme Soviet as being deficit-free. It was expected to increase revenues by introducing a value added tax and high export duties. Military spending, state investments and social programmes were drastically cut in real terms. However, the addendum to the government's February Memorandum already spoke of a budgetary deficit expected to reach 15 percent of the GNP according to international methodology, i.e. if some of the Ministry of Finance ruses (inclusion of foreign credits in budgetary revenues, understatement of Russia's share in liabilities on the internal debt of the former USSR) were abolished.

The Central Bank of Russia toughened its credit policy: gradually increasing reserve demands in respect of commercial banks to 20 percent, raising the rates on centralized credits from 2-9 percent to 20 and then 50 percent, and compounding the terms of centralized crediting. The budgetary resources previously received by former specialized banks and included in their authorized funds were withdrawn from their accounts. These measures resulted in a sharp rise in interest rates, an acute shortage of credit resources and difficulties with keeping up the balance for many commercial banks.

Besides the "classical" methods of limiting the money mass, the government and Central Bank of Russia also had recourse to "forbidden methods" by making more frequent references to technical problems. This is evidently linked to the fact that the government does not have enough authority to pursue a tough fiscal policy. In this connection mention should be made of the following:

1. The artificial deceleration of clearings in the economy. The means of payment circulation and the passage of clearings has been slowed by several weeks in the past few months. In conditions of the crisis of non-payment the Central Bank of Russia has decelerated the conduct of clearings. The period between money being written off of the customer's account and its being entered on the seller's account now lasts several months. This has considerably aggravated the financial problems of enterprises.

2. The cash crisis. For this reason alone the debt to the population in respect to the payment of wages, pensions and other incomes doubled in Russia in the course of only one month to reach 40 billion roubles on April 1. The situation in the other republics (with the exception of Ukraine, which has adopted coupons) is even graver. Delays with paying wages and other incomes have become the norm. The distribution of ready money proper is becoming an increasingly more significant lever of government policy in its relations with the other republics and regions inside Russia.

A problem which is easily prognosticated and just as easily solved by the emission of large denomination banknotes and the reduction of low-nominal clearings (for example, the introduction of definite rules for rounding up prices and incomes in the state sector and recommendations for the same process in the private sector) has turned into a powerful social irritant. It has compounded inter-republican relations and stimulated the accelerated introduction of national currencies by the other republics for the former USSR, as well as the emission of various kinds of money ersatzes inside Russia (in the framework of regions and even individual enterprises). In other words, as an instrument of policy the deficit of cash has generated so many new problems that the government is overwhelmed by them.

3. The delay with officially promised payments, especially in public health and educationcompensation in connection with growing prices, the increase of pensions, benefits, etc. threatens to paralyze budget-supported sectors, which will intensify social tensions.

4. The patent violation of legal succession on a number of the former federal state's liabilities to the citizens and enterprises of Russia. The freezing of the acceptance by savings banks of state loan bonds and the internal currency liabilities of the USSR Vnesheconombank, the abolition of the previously issued licenses for export, the waves of enterprise re-registrations, etc. This sharply lowers trust in the state and its commitments to the population and entrepreneurs, which caused the return in the first quarter of different kinds of state securities to the total sum of 1.1 billion roubles. The accelerated toughening of financial policy has resulted in real financial restrictions for all enterprises and the population: the prices leap has depreciated the money kept in bank accounts, whereas the volumes of crediting and budgetary financing tended to increase at a much slower pace than prices.

But no financial stabilization has occurred.

The budgetary policy of the first three months of 1992 suffered a fiasco. In Russia's territory a mere 366 billion roubles was collected in state revenue as against the original quarterly plan of 513 billion roubles. There was a shortfall in the collection of value added tax and excise duties, and the failure to reap the revenues expected from foreign economic activities has already been mentioned above.

The first incidences have been registered of local authorities (in Bashkortostan, Tatarstan, Chechnya, the Krasnodar Territory, etc.) refusing to remit all the tax deduction envisaged by the law to the republican budget. On the results of two months the sum of money not remitted by local authorities is not so great (8 percent for the tax on profit), yet the development of this trend jeopardizes the unity and stability of the Russian Federation's budgetary system, while speeding up the processes of the state's disintegration.

Fundamental importance also attaches to the sharp increase in the number and share of exclusive government decisions in relation to individual regions and enterprises, which must allegedly reduce discontent with economic policy among the economically strongest and soothe the more strident complaints (Surgut oil and gas production association, Soyuzneftexport foreign trade association, Mikhailovsky ore-dressing complex, Kuzbasrazrezugol concern).

Similar methods are also used in the pursuit of social policy. The tactics of "petty" concessions have so far made it possible to avoid mass strikes, placing an ever heavier burden on the budget.

What enabled the government to make a statement at the Congress about the minimum to the tune of 1.5 percent of the GNP deficit of the state budget on the results of the first quarter? This was possible thanks to rather obvious arithmetical methods:

• the earnings and spendings involved in foreign economic activities were excluded from the estimate of the actual execution of the budget (there was transition to taking stock of these activities solely on the balance). It became impossible to collect the planned sums of export duties;
• the government was unable to buy foreign currency from exporters with which to pay the interest on the foreign debt;
• there were very considerable delays in the sale of currency earnings to the currency reserve. As a result instead of the 2.9 billion dollars due to be paid out in the first quarter after all deferments, a mere 351 million US dollars (or under 12 percent) were paid out as of March 6. Undoubtedly, the fulfillment of Russia's foreign liabilities would have sharply boosted budgetary expenditures (even under the Central Bank of Russia's special exchange rate of 55 roubles per dollar 2.5 billion dollars mean a budget deficit as high as 140 billion roubles);
• as before foreign credits are taken into account in budgetary revenues;
• a significant part of the already revised expenditures of the first quarter nearly 46 billion roubles was "transferred" to April, which temporarily produced a favourable picture but is bound to show in the results of the second quarter;
• the nature and terms of the "loan" of some 30 billion roubles borrowed by the Russian Ministry of Finance from local budgets, making it possible to minimize the actual sum of the deficit, are not clear.

Statements by the leaders of the government and the Ministry of Finance of the Russian Federation on the budget for the first quarter of 1992 cannot but evoke mistrust after the appearance of at least four different official documents containing data which significantly differ from one another: the government's budgetary messages to the Supreme Soviet dated January 14, March 10 and April 29, 1992, the Law "On the budgetary system of the Russian Federation in the first quarter of 1992", the Memorandum "On economic policy", and the government's Resolution No. 169 on March 17, 1992.

The Central Bank's credits are used as before to f budget deficit. It cannot be hoped to place state securities among the population because, having discontinued circulation of 1982 state internal loan bonds, the government has intensified the people's mistrust in all state securities, thus compounding the flotation of fresh loans.

Orientation towards overcoming the budgetary deficit at an accelerated rate has intensified production recession (this tends to undermine the revenue basis of the budget) and triggered an escalation of social demands. It is safe to forecast an increase in the relative size of the state budget deficit in the second quarter of 1992 in comparison with the first.

Despite its firm statements the government has been unable to keep up the course it adopted towards limiting credits.

The issue of 83 billion roubles worth of loans in January was three times that of the December level. Loan investments during the month increased 17.6%, or three times as much as was planned. By the end of February Central Bank loans to commercial banks were up 40% over the figure at the start of the year, whereas they were originally expected to rise 15% in just three months.

The proposed sought loan policy was violated in many respects:

• The Central Bank of Russia advanced loans (at 50% and then at 100% annual interest) for the left-side balance of commercial banks, thereby making them confident that this sort of approach will naturally continue in the future.
• The Central Bank of Russia advanced special-purpose loans worth 36 billion roubles to agricultural enterprises and timber and oil industries, and this provoked a stream of similar demands from other types of enterprises.
• Despite the stage-by-stage increase in the interest rate, it is still negligible given the present rate of inflation which means that the loans are simply being "given away".

The decision made early in April to issue additional centralized loans worth 200 billion roubles only confirmed the government's reneging on its pledge to severely limit the amount of money in circulation.

The slackening in the financial policy immediately resulted in an increase in the issue of money. Whereas in January it fell to a third of December's (down to 17 billion roubles), in February it reached 24 billion roubles, and in March 37 billion roubles. The sum of money the state failed to pay in the form of wages, salaries, pensions and benefits was worth more than a monthly issue of money.

The government regards the increase and later relative stabilization of the rouble's exchange rate at the exchange market as one key sign of success of its macroeconomic policy.

In our view the main reason for the increase in the rouble rate wasn't the Russian government's financial policy, albeit it was important. Let's consider the facts. Prompted by panic, the rouble rate plunged during October 1991 - January 1992 from 70 to 230 against the dollar. The exchange market was pervaded by panic in late January 1992 with prices out of control. The Central Bank off Russia and the government launched a propaganda campaign whereby a number of officials made statements about an imminent increase in the rouble's exchange rate to 35-50 against the dollar. Following this, the Bank sharply stepped up its sale of hard currency at the Inter-Bank Currency Market (IBCM), and sold 3-4 and, later, up to 15 million dollars at each competitive trading session. The various technical restrictions on demand for roubles at the IBCM, including restricted participation at auctions, permit a wide manipulation of the rate of exchange. Increases in the rouble exchange rate are not matched with the dynamics of main macroeconomic factors; thus they are artificial, and therefore can only be temporary. This is a stability sustained by hard currency interventions of the Central Bank of Russia whilst Russia fails to honour its commitment to other countries. This playing at all's well will continue as long as our creditors - the governments and banks of industrialized countries continue to shut their eyes to this dubious operation.

All that indicates that the rouble exchange rate may plummet at any moment. This can be provoked by a high inflation rate, a rise in fears that inflation will rise further in connection with the jump in energy costs, substantial cuts in the size of hard currency interventions by the Central Bank of Russia, as well as buyer's "overcoming" of the artificial restrictions on buying hard currency. No real stabilization of the exchange rate seems to be in sight because it continues to experience too powerful an impact from such divergent factors as the expectation of a money reform, introduction in the "rouble zone" of other national currencies, the bringing into play of the six-billion fund (to stabilize the rouble) as promised by the G7 industrialized countries.

Thus the government has practically fallen short of its objective to achieve fast financial stabilization. Worse than that, the inflation rate during February-April was greater than it was October-November 1991. According to the Committee for Statistics of the Russian Federation, following the 3.5-times price hike in consumer goods, retail prices went up 24% further in February and 21% in March. While sale price indexes were correspondingly 500, 175 and 128 percent. Independent experts think that the real level of inflation is 1.5-2 times greater. The government promised to bring inflation down to 3-5 percent per month at the end of the first quarter of this year.

One has to admit that THE GOVERNMENT'S FINANCIAL POLICY, WHICH WAS THE PRINCIPAL AND VERY NEARLY THE ONLY POLITICAL LINE CONSCIOUSLY AND PURPOSEFULLY PURSUED BY THE RUSSIAN GOVERNMENT, HAS SUFFERED A SETBACK.