…BUT A REPEAT PERFORMANCE OF 1999 IS UNLIKELY.

Moscow seems intent on taking its new-found fiscal prowess to new heights this year. The 2000 budget assumes that the share of GDP collected as federal revenues will grow to 14.9 percent, while spending as a share of GDP is to remain flat, at 16.0 percent. According to Russian government methodology, the federal deficit will fall to 1.1 percent of GDP, even though 4.1 percent of GDP is to be allocated to service Russia’s debts.

As many observers have pointed out, these targets raise concerns in three areas. First, in light of the fact that the federal government was only able to collect 11.3 percent of GDP in revenues in 1998 and 12.9 percent of GDP in revenues through the first ten months of 1999, the 14.9 percent the revenues target may well be too optimistic. Second, uncertainty associated with military spending in Chechnya casts a long shadow over the expenditure side of the budget. Although the full fiscal consequences of Moscow’s “antiterrorist operation” may never be known, higher military spending associated with Chechnya and Russia’s more bellicose military posture could boost the federal deficit by at least 1.0 percent of GDP. Third, the budget assumes US$6.0 billion in foreign credits will be available to finance the 2000 deficit. The current tensions between Moscow and the IMF, should they continue into 2000, make the release of such credits unlikely. Smaller external financing is likely to result in lower expenditures, more borrowing from Russian lenders and higher inflation.

On the other hand, the 2000 budget’s ambitious nature means that Moscow could fail to hit its fiscal targets next year without doing much damage to the Russian economy. Moreover, the 2000 budget is based on yearly projections for inflation (18 percent) and the exchange rate (US$1 = 32 rubles) which are quite conservative. Higher inflation and a stronger ruble could boost budget revenues and reduce the ruble costs of servicing Russia’s debts. However, should oil prices drop sharply, or should the emerging economic recovery falter, Russia’s budget could be among the first casualties.

MOLDOVA’S NEW GOVERNMENT.