Publication: Monitor Volume: 4 Issue: 87

Russia’s economy finally shows signs of bottoming out from its eight-year recession. Monetary indicators appear stable, although the federal government continues to run a high deficit. The government may face a problem in financing the mounting public debt in future years. Budget performance was to be the central issue on the agenda of the first meeting of the new cabinet on April 30.

In February, gross domestic product was 2.1 per cent up on the level a year ago, while industrial output showed a 1.6 per cent rise. Inflation was running at an annual rate of 8.5 percent in March, down from 11 percent in 1997 as a whole. (Vek, No. 16, April) This modest economic recovery has not yet shown up in living standards. In the first quarter of 1998 real incomes dropped 6.8 percent, the fall being largely due to wage arrears, which rose to 61 billion rubles ($10 billion) at the beginning of April. The number of people living on incomes below the official subsistence minimum rose by 1.3 to 22 percent, or 32 million persons. (RIA Novosti, April 30)

In the first two months of the year, total budget receipts (federal and regional combined) were 74 billion rubles. Spending stood at 83 billion rubles, leaving a combined deficit of 9 billion rubles, equal to 2.3 percent of GDP. Receipts were twice as high as those gathered during the disastrous first two months of 1997, but are still only about 65 percent of the planned level. Unpaid tax arrears had accumulated to 190 billion by March 1. For 1998 as a whole, the Finance Ministry foresees federal spending of 16.5 percent of GDP and revenue 11.9 percent of GDP, leaving a federal deficit of 4.5 percent of GDP, down from the 6.8 percent deficit of 1997. Regional budgets are expected to run a deficit of less than 1 percent of GDP.

The total stock of domestic debt at the end of 1997 amounted to 21 percent of GDP, and interest on debt payments currently accounts for 27 percent of federal spending. This proportion could climb alarmingly over the course of the year if federal spending targets are not met, and if interest rates on the treasury bond market remain stuck at their current 30 percent level. Curiously, 65 percent of the government’s debt is held by the state-owned Sberbank and Central Bank. The remaining price-sensitive segment is split between Russian commercial banks (20 percent) and foreigners (25 percent). At least Russia’s external debts will not cause any problems in the short term. Thanks to last year’s restructuring, interest payments on Russia’s $130 billion foreign debt are only about $7 billion a year (or 1.3 percent of GDP). (Russian Economic Trends, March 1998)