Publication: Prism Volume: 2 Issue: 3

Economic Success Breeds Political Discontent

Russia on the Eve of the Elections: Politicians vs Economics?

by Aleksei Kondratov

Analysts have unanimously appraised the past year as the best since the reforms began in the country with regard to macroeconomic indicators. The rate of inflation decreased in 1995 from 20 percent in January to 3.5 percent in December. Furthermore, the past year was marked by an increase in production volumes in the raw-material producing branches of the economy, ferrous and nonferrous metallurgy, the chemical industry and petrochemicals.

According to the Russian State Statistics Committee the combined industrial production volume in 1995 equaled 98 percent (in real terms) of the corresponding 1994 figure, while the GDP declined 4 percent. In 1994, the decline in the GDP from 1993 equaled 15 percent.

These achievements are largely a result of the austerity regime imposed by the government. The government has tried to use new mechanisms to fund the budget, for example, "mortgage" auctions (where the state provides its share parcels in the industrial enterprises as collateral for loans), developing the market for state’s short-term bonds and issuing a tranche of Savings Loan Bonds for the public. A considerable contribution was made by the tight credit and financial policy inspired by the International Monetary Fund; It is this very policy that has made it possible for the country (for the first time since the reforms began) to stay within the limits of the affirmed state budget and to abandon the practice of granting favorable loans to unprofitable industry.

At the same time, these tough measures have resulted in not only the achievement of relative stabilization but in the cutting of the state financing of social programs; the latter has made the public critical of the Cabinet and this was graphically manifested during the December 1995 elections. The majority of the electorate backed the Communists who advocate revising the current economic course and vehemently criticize the government for their "anti- social" policy.

Presidential elections are coming soon and these elections will be a battlefield for real power in the country. The Russian Constitution provides a president with considerable powers, including the power to appoint key figures in the government and the right to dissolve the parliament. Therefore, if the Communists win the presidential elections scheduled for June 16th, it will mean a fundamental change in the country’s economic course.

Until June, 1996, the Economy will Continue to Stabilize

The fact is that up until June 1996 the current Cabinet will continue to hold the levers of economic power. The President’s decision to remove Anatoly Chubais, who has been a champion of the economic reforms, from the government has inflicted damage on the government, the Cabinet is still able to continue the course of reforms.

Prerequisites for the government’s course to remain unchanged include the terms of the state budget for 1996 which was adopted in December 1995, the decision to extend the effect of the semi-fixed ruble/dollar rate and the refusal of the CBR to grant credits to the government to compensate for the budget deficit.

In an interview he granted to an Itar-Tass correspondent while he was the senior vice premier Anatoly Chubais, commenting on the results of the past State Duma elections, stated that "the current Cabinet will enjoy every opportunity during the first half of 1996." "During this time," Mr. Chubais explained, "the Duma will be unable to retract the fundamental economic conceptions which were passed earlier." "Therefore," Mr. Chubais concluded, "by mid 1996 we will achieve a growth in the GDP of 1-2 percent."

Many believe that the public will feel the results of the economic policy pursued by Chernomyrdin’s Cabinet in the next 6 months to come. If these forecasts come true the disposition of forces on the eve of the Presidential elections will be different (from that during the last two parliamentary elections) and Yeltsin may receive carte blanche to continue the present course of reforms without revising it dramatically.

At the same time analysts remark that the struggle for votes may prompt Yeltsin into making populist moves that could undermine the positive trends which have taken shape in the economy, such as the reduction of the inflation rate and the slowing of the tempo of the decline in production.

In fact, Chubais’ certainty, expressed in early 1996, was probably dictated by yet another consideration. Chubais was the man in the government responsible for holding negotiations with international financial institutions, specifically for the preparation and signing of Russia ‘s agreement with the International Monetary Fund on granting Russia a three-year loan worth $9 billion. Analysts involved in the problem believe that the "IMF factor" will play a considerable role for Russia in determining her economic policy during the time which is left until the Presidential elections. The fact is that Russia badly needs this loan because it is already included in the calculations for deriving the 1996 state budget. The negotiations between Russia and the IMF will in all likelihood continue until June 1996 (the IMF apparently wishes to be insured against political risk) and their results will depend on Russia’s ability to meet the IMF’s demands regarding economic policy.

"Capitalism with a Human Face"

The appointment of Oleg Soskovets as head of the Yeltsin re-election effort has led many to believe that if Yeltsin is re-elected, Soskovets will become the prime minister. Moreover, it appears that Mr. Soskovets has been chosen to articulate the president’s election program. In an interview he granted to an Interfax correspondent in late January, Soskovets stated that "the government is not going to introduce any dramatic changes in the present economic course and will continue along the path of reducing inflation and rigid financial policy."

He stressed that the government will not change its policy to pander to political demands in connection with the upcoming presidential elections.

Outlining his immediate plans, Soskovets remarked that he will place his bets on creating favorable conditions for investments, stimulating the development of domestic goods producers, the formation of new financial-industrial groups and imposing stricter controls over pricing policy in the case of the so-called natural monopolies.

He also, however, has spoken recently about the need to introduce certain changes in economic policy in order to build "capitalism with a human face." This, in turn, appears to become a major conception of the renovated Cabinet. At least, in an interview he granted to the press in January, Mr. Soskovets remarked that "a rigid budget and financial course should be combined with searching for ways to resolve problems of the social sphere and patronage of domestic goods producers."

This statement cannot be ignored when analyzing possible scenarios for the Russian economy, the more so since certain elements of the conception have already taken shape. Thus, the State Duma has adopted a resolution increasing the minimum wage and pensions by 20 percent and VAZ automobile plant director Vladimir Kadannikov was appointed to replace Anatoly Chubais as senior vice premier (Anatoly Chubais advocated reducing import duties); the latter move can well be regarded as directed at patronizing domestic goods producers.

Curbing Inflation to 1.5 Percent Per Month?

General stabilization requires that inflation be cut to 1-2 percent per month. This is precisely what the law on the federal budget for 1996 calls for.

Is it reasonable for a country where the prices grew 131 percent during the past year to expect to achieve such a result? According to forecasts made by the Economics Ministry this goal is fairly realistic. The Ministry has drawn two scenarios of the possible development of events: an optimistic one and a pessimistic one. According to the former, manufacturers’ prices in 1996 will climb at the same rate as retail prices, increasing at 25 percent per year or 1.9 percent per month. According to the latter (pessimistic) option the rate of inflation in the country will equal 3.5 percent per month due to the government’s possible shifting to a milder monetary policy in the first quarter of the year. According to this (pessimistic) scenario the rate of inflation will equal 6 percent per month during the first three months of the year. In the second quarter, inflation will gradually diminish to 4 percent per month. In the second half of the year, the rate of inflation will be not higher than 2 percent per month and by the end of the year it will diminish to 1.5-2 percent per month.

According to the optimistic scenario the rate of inflation will amount to 3-4 percent per month during the first quarter; 1.8-2 percent per month during the second quarter and 0.8-1 percent per month during the third and fourth quarters of 1996. During the first quarter, inflation may be promoted by price hikes for products manufactured at the enterprises which belong to the so-called natural monopolies. The latter price hikes may come as a result of the prices for these items (along with rent, utility and transport tariffs) being frozen as of late 1995 and in connection with state subsidies for these enterprises being cut.

According to the Economics Ministry’s forecast, agricultural workers and the producers of consumer goods and nonferrous metals will encounter tough government pressure in pricing policy; current prices for many of these items have already exceeded the corresponding world prices.

In the first half of 1996 the government will probably allow the natural monopolies to increase their prices which will probably cause a sales crisis and promote a decline in production primarily in the processing industries. However, specialists from the Economics Ministry believe that these adverse trends will not last for very long. The experts stress that a mechanism for regulating prices (which is currently being elaborated) for goods produced will help lead to prices and tariffs which best reflect the country’s economic situation.

The reduction of inflation is definitely a positive factor. The reduction of the tempo of price hikes helps to bridge the gap between the rich and the poor and thus makes the economic course more "socially oriented." The reduction of the inflation rate during 1995 helped to reduce the number of people living below the poverty line in the country by 20 million. In addition to that, the reduction of inflation stimulates investments in industry. It is well known that in the situation of high inflation, financiers tend to invest their capital in commercial profiteering, while as soon as inflation falls to a "normal" rate, the country’s financial resources begin to stream into the production segment of the economy.

A steady and consistent reduction of the inflation rate (which is expected to take place during 1996) will help make the economic situation in Russia more stable and predictable, will prompt a reduction of bank interest rates, will make credits more accessible and hence will promote industrial growth. A reduction of the inflation rate will help create the conditions for the Russian banks to invest in industry. If the government’s forecasts come true the domestic commercial banks will be forced to reduce their interest rates by 40-50 percent during 1996; therefore, domestic commercial credits will at last become accessible for industrial enterprises.

Translated by Aleksandr Kondorsky

Aleksei Kondratov is an economic analyst for Interfax.