MIXED MESSAGES ON MONETARY AND FISCAL POLICIES…

Although the Kremlin-Central Bank program pledges to hold Russia’s liberal course on the economy, it contains some macroeconomic policy contradictions that are not easily reconciled with its liberal rhetoric. This is most apparent in the sections on inflation and monetary and exchange-rates policies. The program lists inflation as a serious threat and calls for a reduction in year-on-year consumer price inflation to 14 percent by December of this year (down from 25 percent in April). Tighter monetary policies are seen as key to reducing inflation, because the monetary base grew by 70 percent last year. But the program also calls on the CBR to keep the ruble from appreciating, in order to lock in the gains in Russia’s industrial competitiveness resulting from the August 1998 financial crisis. Preventing the ruble’s appreciation in the face of large trade surpluses forces the CBR to buy dollars from Russian exporters, and issue freshly printed rubles in exchange. While the CBR’s growing dollar war chest (official reserves reached US$32.5 billion on May 11–a new record) may help service Russia’s foreign debt, it will work at cross purposes with the goal of knocking ten percentage points off the inflation rate by the end of the year.

The program also contains some mixed messages on fiscal policy. In his state of the nation address in early April, President Vladimir Putin called for the creation of a two-stage federal budget process. Under this proposal, the first part of the budget would be set according to pessimistic assumptions about oil prices and other external variables. The relatively Spartan expenditures contained in this budget–which would be free of uncertainties linked to factors over which the government has no control–would be subjected to a single, up-or-down vote in parliament, and would not face extensive parliamentary amendments. The second budget would take the form of a “stabilization fund” that would be financed by “additional revenues” whose magnitudes would be determined by the extent of Russia’s oil windfall. Parliamentary discretion over these expenditures would be much more extensive. Some commentators have argued that this stabilization fund should be kept offshore, in order to minimize oil-related dollar inflows and reduce the upward pressure on the exchange rate.

Putin’s proposal has generated extensive discussion on the Russian press, and, according to presidential advisor Illarionov, the 2002 federal budget is being prepared according to its logic. But Moscow’s official economic program for 2002-2004 makes no reference to this two-stage budget process whatsoever. Emphasis is instead placed on further reforms of the tax system (especially the profit tax), ending federal budget arrears, improving tax administration and abolishing the legal basis for “unfundable mandates.” Whether this shows that Putin’s budget proposal has withered on the vine, or that the official economic program to be irrelevant, remains to be seen (Reuters, May 15; Izvestia, May 16).

…AND ON STRUCTURAL REFORM.