Publication: Monitor Volume: 1 Issue: 141

It is generally agreed that a communist/nationalist victory in December’s parliamentary elections will have more immediate repercussions in foreign policy than in domestic policy. A sober and empirically-based analysis by two Russian economists substantiates this prediction by mapping out the probable economic effects of a communist/nationalist resurgence and concluding that the key event for the economy is not the December elections but next June’s presidential election. (8) Based on econometric modeling of recent inflation and on campaign statements by communist and nationalist leaders, Sergei Sinelnikov and Georgi Trofimov outline three scenarios. (1) The best-case scenario for the health of the Russian economy is that the government’s present draft budget for 1996 gets final approval from the Duma before the end of this year and that next year’s presidential election does not bring a communist or nationalist to power. In that case, 1996 should see the beginning of an economic recovery, i.e., growth of GDP accompanied by sustained lower inflation. (2) A less desirable scenario is that the Duma rejects the present draft and adopts a less austere budget for 1996, but that no radical change in government policy follows because the presidential elections in June do not bring a communist or nationalist victory. In that case, the budget deficit would probably rise by 2 percent from the 3.9 percent of GDP presently planned to 5.9 percent; this would provoke inflation of 4-5 percent a month in 1996 which, while not good, would not be disastrous. (3) The worst-case scenario is that the Duma relaxes the 1996 budget and that a communist or nationalist wins the presidential election. Communist and nationalist campaign promises include additional subsidies on food prices, subsidies to support special exchange rates for exporters, and increased defense spending; Sinelnikov and Trofimov say such policies would lead, in 1996 as a whole, to a budget deficit equal to 11-12 percent of GDP. Such a deficit would have to be financed by a large increase in the money supply, causing inflation to climb in the second half of 1996 to reach 13.8 percent a month in December, that is, an inflation rate of 95 percent for the whole of 1996. The authors stress that inflation would be accelerating throughout the second half of 1996 and continue in 1997, which is when the most serious economic effects would be felt. They therefore conclude that while a communist/nationalist victory in the December elections would retard efforts to stabilize the Russian economy, the situation would not be hopeless, but that a June 1996 victory for a communist or nationalist presidential candidate would have a disastrous effect on the economy in 1997.

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