NONPAYMENTS: THE “BRIGHT” SIDE TO RUSSIA’S ECONOMIC RECOVERY.

Sharp declines in nonpayments of all types have been one of the most hopeful aspects of Russia’s nascent economic recovery from the August 1998 financial collapse. The total amount of wage, tax and inter-enterprise arrears at the end of 1999 stood at 45.6 billion rubles (US$1.7 billion), down from 78.6 billion rubles (US$3.7 billion) at the end of 1998 (Sotsial’no-Ekonomicheskoye Polozhenie Rossii, December 1999). This amounts to a 42 percent in nominal ruble terms, a 54 percent decline in dollar terms and a 63 percent decline in real ruble terms. Nonpayments have not been vanquished from the Russian economy, of course, and inter-enterprise arrears in some sectors are proving to be quite stubborn. Still, their decline suggests that the “virtual economy” metaphor often used to describe Russia’s financial pathologies is losing some of its power.

The decline in nonpayments is most apparent in wage arrears owed by federal and regional government institutions to their employees. These fell by 49 percent in nominal terms, and by 69 percent in real ones last year. This decline helped push total wage arrears (owed to both public and private sector employees) down 43 percent in nominal terms, and 65 percent in real terms. Although nonpayments among enterprises rose some 11 percent in nominal terms, they shrank by 30 percent when deflated by growth in Russia’s producer price index. The magnitudes of these real declines ranged from 13 percent in the service sector to 44 percent in the transport sector, with the real value of inter-enterprise arrears in industry dropping 28 percent.

While Russian enterprises appear willing to settle their overdue bills with one another, they seem less interested in settling their outstanding obligations vis-a-vis banks or the tax authorities. Enterprise tax arrears to federal and regional governments fell by “only” 4 percent in real terms last year, while arrears to banks through the first 11 months of the year declined by only 6 percent. The arrears of industrial and construction enterprises vis-a-vis banks actually grew in real terms.

Most economists see these declines as a positive development, showing that more Russian business transactions are being conducted in the light of day in accordance with generally accepted financial principles. But in addition to these forms of nonpayment, Russian enterprises use many other noncash mechanisms, including barter and tax offsets (the mutual cancellation of tax arrears and sequestered government expenditures) to avoid the strictures of market discipline. While the extent of these departures from best international financial practices also seems to have declined in 1999, there can be little doubt that much of the Russian economy remains off the books and is likely to stay that way for some time. Moreover, it is not clear that Russia’s apparent infatuation with financial orthodoxy would survive such economic shocks as a steep decline in the price of oil or a sharp rise in inflation.

OLD HABITS DIE HARD AT CIS ECONOMIC COUNCIL.