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Books by Grigory Yavlinsky
Economics and Politics in Russia
The Center for Economic and Political Research (EPIcenter)
Nizhni Novgorod-Moscow, 1992
CHAPTER 2. The New Policies of the Administration.

2.1 The Course of Economic Policy

Short-term perspectives

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The coming winter will be much more difficult than last; insufficient electric power (above all, in the Northern Caucasus and the region east of Lake Baikal), fluctuating prices of oil and petroleum products, the growing danger of failure of cities' heating systems, the intensification of feed shortages in the majority of regions, and potential irregularities in the country's food supply all point to this conclusion.

Enterprises, having exhausted their reserves and fulfilled government orders, are simply closing their production lines and discharging workers; there is no further production, no raw materials, no assembly, and no money with which to refit the factories. From the spring of 1993, massive unemployment will be an element in our lives. Women and individuals with higher education have already come into contact with this phenomenon; the next group on the street will be skilled workers.

The directors of large enterprises, disorientated by the contradictory steps taken by the administration of Russia, by the campaign to turn enterprises into joint-stock companies, by the voucherization scheme, by the belated re- appraisal of funds and the games played over centralized credits, are increasing their pressure on the administration to "dislodge" various benefits. The tactic of burying the rising cost of production inputs in the cost of output is continuing. Each enterprise director will try to preserve jobs as long as possible, but there is the possibility of many limitations. The fall in production and in imports is continuing, and investment in manufacturing is approaching a minimum. Housing construction is faltering.

Without goods and without profit, there can be no taxes. The republic's budget, the outlays of which today alreadyexceed receipts by a third, can only finance further spending via monetary emission. The result is the distribution of new government credits. Today there does not exist the political willpower to liquidate hundreds of enterprises. Already in autumn, the grinding cog-wheel of inflation will continue to turn: A rise in the price of oil and gas followed by the resulting increase in the cost of feed and foodstuffs. An increase in income level followed by a new increment to the cost of consumer perishables. Government credits for the replenishment of enterprises' resources followed by a rise in the level of interindustry defaults. The overestimation of government enterprises' capital resources followed by the rise in the general price level. The monthly level of inflation, brought down to 10 or 15 percent in the summer, will increase three to four times.

The drastic increase in the population's income, the removal of indebtedness of wage payments, the substantial increase in minimum pensions and minimum wages, and the "income spiral" in many branches of the economy all have the end result of increasing the demand for consumer goods, above all for inexpensive food products -- bread, pasta, cereals, and vegetables. The supply continues to get smaller. Consequently, the consumer market in the fall through the spring will witness the further intensification of food shortages. There will be a reduction in food inventories, bursts in demand will become more frequent, and once again several types of goods will disappear from the shelves. Attempts by the administration to regulate the different markets by the simple imposition of prices will only worsen the shortages. A paradoxical situation will follow, in which a shortage of goods occurs in conditions of "unrestricted" and ever increasing prices.

The weekly increase in prices will lead to more inflationary expectations. People will try to insure themselves against the ever devaluating rouble. If a significant increase in the interest rate on personal savings accounts is not made, then the flow of funds from such accounts will continue. Institutions in charge of pension funds, finding themselves unprepared for the speedy increase in minimum pension payments and seeing their resources depreciate throughout the year, will not be able to provide the ever-rising pension and benefit payments. Hence, the gradual destruction of the government system of social services, free medical care and education continues.


A declaration regarding medical insurance has yet to spell out its methodology and its organizational structure. More important, however, is the fact that no sources of finance exist; the budget is empty, and people are either psychologically not prepared or, more likely, simply not willing to pay for medical care. In this area, also, one finds an apparent paradox: A significant reduction in the number of physicians due to the lack of demand during drastic worsening of traditional health level indicators.

What is left for "normal" people to do? The "naturalization" of daily life: Barter, gardening, relatives in the countryside. Theft is sharply increasing -- in industry as well as in apartments. Worries about personal safety have become the number one concern for individuals. A massive reverse migration has begun -- from the cities to the countryside, to relatives, to the earth, to work. Some search for happiness abroad.

Local administrations, upon whom lies the responsibility for local welfare provisions, will soon no longer be able to count upon help from Moscow, inasmuch as the capital is losing control of the country's resources. In their attempts to minimize their contact with "higher authorities," local governments are beginning to take local measures: Creating inventories of grain, heating products and foodstuffs. Financial resources are needed for these actions. Below we list how such authorities are fighting for their piece of an ever-shrinking "pie:"

-- Non-payment of tax receipts to the republican budget. -- Barter agreements in external and inter-regional deals and refusal to sell hard-currency earnings. -- Autonomous exploitation and extraction of resources and the direct search for foreign partners and potential investors. -- Attempts to use the national banks in the Russian Federation and the regional banks of the Central Bank of Russia for supplementary credits. -- As cash shortages intensify, the utilization of money substitutes.

At the regional level, structures that successfully satisfy the above functions are formed quickly. Many controls over the distribution of resources are leaving Moscow and are now found in the hands of a quickly growing regional elite. And quickly a large difference in the conditions of different regions is becoming apparent; some of them are facing serious insufficiencies in resources. In the "natural" differentiation of regions, the federal administration is making highly erratic allocations of taxes and other benefits to those constituent member republics of the Russian Federation and oblasts (regions) with a well organized working class (e.g., Vorkuta, Kemerovo). The average salary paid to workers of the same field living in two neighboring oblasts already frequently differs by 2-3 times. This situation may generate inter-regional conflicts and makes a consistent economic policy impossible.

Republican powers can, in the short term, do very little to counteract the decentralization in the management of economics as much because of an insufficient appraisal of the problem as because of the fierce battles within organs of power.

The economy will shrink before our eyes; the flow of people from the north and from some regions in the far east will increase. Economic life in these regions will die out.

Likewise large scientific centers will die out in the absence of financing. An obvious loss in Russia's international standing will likely result. This general economic recession will continue throughout the whole of 1993.

At the same time, one can hardly expect a sharp decline in imports from CIS states. Besides the other former member states of the Soviet Union, there are as yet no alternative markets for these new republics. The West will most likely continue to provide credits and humanitarian aid for critical imports to Russia through international financial organizations. But it is senseless to make a serious financial policy from within a changing Russian economy under the present circumstances.

In the autumn and winter, the inflationary potential will grow:

1. Price of this year's harvest. Given the established purchase price of grain and other agricultural goods, the cost of production is sharply increasing. This will demand a compensatory increase in incomes. 2. Energy prices. The newly established prices on grain do not correspond to the relative costs of energy. Already the state of oil extraction calls for significant increases in budgetary expenditures or a steady increase in the energy prices. After the immediate price rise in September, oil extraction enterprises significantly exceeded, by two or three times, the suggested price "ceiling" of 5.2 thousand roubles per ton. The uncontrolled price increase for oil and petroleum products is a powerful inflationary force. 3. Default crisis. Already the government credits used to replenish enterprise capital stocks are having an inflationary effect. The provision of credit for near

completed stages of interindustry debt arrears requires a substantial expansion of credit, which will first make a splash in the price of producer goods, and then ripple out to consumer prices. 4. Re-estimation of capital funds (indexation). The results of such a process are a jump in amortized deductions, which brings with it, on one hand, a production cost push on prices and, on the other, a decrease in the profits of the enterprises and thereby a decrease in profit taxes for the government. The positive result, an increase in capitalization via deductions to amortization, may, to a large extent, be "eaten up" by the consequential effect on inflation growth.


Practically all of the above was contained in the logic of the course of events in the form that it took over the last few years, especially in 1992. The replacement of various officials in the Russian government, which has been taking place since the spring, and judging from everything will continue through the autumn and the beginning of winter, considering the proposed programmes of the candidates for the key posts, will not result in any positive progress.

The economic policy of this past year has created a significant potential for a social backlash. The possibility exists for a restoration of the vertical system of government management of the economy and a return to the usual methods of running enterprises. One could expect the freezing of prices and wages, the increasing of government investment and credits to government enterprises, and a rebirth of the sectoral approach to economics. But such an attempt to recreate an administrative approach to social and economic management would be absolutely barren and would even hasten the process of disintegration.

Therefore, by the middle of 1993:

Republican budget: Receipts will be no more than half of outlays, this deficit being funded virtually entirely by monetary emission. VAT will be virtually impossible to collect. Either a massive refusal by government enterprises to pay taxes or the distribution of special privileges from the government to those bodies. Local budgets: Ninety percent of local expenses will go to social and cultural measures; The financing of city transport systems and housing services is an insoluble problem unless alternative forms of financing are found

soon. Refusal to pay republican taxes in one form or another. The possibility of disintegration in Russia's financial system. Credit: An exponential increase in size. Practically all credits will go toward wage payments. Bank support for centralized credits. An ideal environment for large-scale financial speculation, and the possibility of bankruptcy in several large joint-stock ventures. Attempts by regions to create their own credit emission systems. Export and Hard Currency Receipts: A further decrease by 20- 30%. A large portion of hard currency earned will remain abroad. Multiple exchange rates and trading and cash exchange rates will fall by several factors. Production: Curtailment of high-technology production, a sharp decrease in assortment of goods, continuation of price imbalances and small land-holdings in place of former collective farms. Insufficiencies in cattle feed, and mass slaughter of livestock in winter and spring. Worsening conditions for the growth of production, including on personal subsidiary land-holdings and large-scale agriculture. The federal authorities do not possess the necessary rights, economic levers or political influence for the development and execution of economic policies similar to the traditional "centralized" system. Russia, in the autumn and winter of 1992, will be far closer to hyperinflation then it was in the fall - winter of 1991, before reforms began.

We have attempted to present only a few examples of the economic dynamics of the near future, as it appears in December 1992. The situation will continue to worsen in practically all parameters, but no catastrophes will occur. Despite the continuing recession, massive unemployment and bankruptcies can be avoided. Despite the long drop in the standard of living, no social groups are starving, and so on. Life goes on and the economy continues to function, even in conditions of hyperinflation.

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