Publication: Monitor Volume: 3 Issue: 204

On October 28 the Russian government met and approved the revised 1998 budget, which had been hastily agreed to earlier this week by the tripartite commission (of government, Duma and Federation Council representatives). The budget will now be considered by the Duma on November 12 along with 11 tax bills. The government seems for the time being to have given up on any chance of moving forward on the new tax code. There could, moreover, still be trouble in the Duma over the government’s plan to raise the VAT on food from 10 to 20 percent and the tax on foreign currency exchange from 0.5 to 1 percent, both of which will require the Duma’s approval.

The new budget envisions revenues of 368 billion rubles, spending of 500 billion, and a deficit of 132 billion ($22 billion). (The budget is expressed in the new denomination rubles which are to be introduced on January 1, 1998, with one 1998 ruble equaling 1,000 1997 rubles). The projected deficit amounts to 4.7 percent of GDP (using Russian rather than IMF methodology) or a hefty 25 percent of total budget spending. The projected inflation rate for 1998 is 5.7 percent, and the average exchange rate 6.180 rubles to the dollar. (Rossiiskaya gazeta, October 29)

The government caved in to most of the parliamentarians’ demands in the trilateral commission. They hiked planned spending by 28 billion rubles, and also upped the projected GDP by 90 billion rubles (and hence projected tax receipts by 5.5 billion rubles.) The government agreed to cut import tariffs by only 1 percent and not the 5 percent they originally requested. They also raised the tax collection target from 81.5 percent to 86.6 percent.

So far this year, only 60 percent of taxes due have actually been paid: a record which First Deputy Prime Minister Anatoly Chubais admitted to the government meeting on October 30 means that the 1997 budget is "practically ruined." (Radio Rossii, RIA-Novosti, October 30) The government will have to allow about 60 trillion rubles of tax arrear offsets to try to clear the decks over the next two months. This involves writing off tax arrears against budget debts to the firms involved: a dubious procedure, and one condemned by the IMF. Chubais promised that next year there will be no more off-sets (a somewhat hollow pledge by now) and that ministry spending will be controlled down to the last brick — something the country was used to during the past 75 years of socialism, he remarked.

According to one commentator, the economy is being "squeezed like a lemon" while budget policy is trapped in a "vicious circle" — the Duma approves an inflated budget with over-optimistic revenue targets, while the government allows firms’ tax debts to accumulate. (Segodnya, October 29) The 235 top debtors alone owe 115 trillion (1997) rubles, led by the car giant AvtoVAZ, which owes 8.5 trillion. Most observers see the new draft budget as a cynical ploy: the government pretends to listen to the Duma’s demands, but will go ahead with its own spending cuts (through sequestration) whatever the budget says.

Payment Arrears Still a Major Problem for Russian Economy.