THE FORTNIGHT IN REVIEW

Fears of budget collapse and a forced ruble devaluation were staved off on July 20, when the IMF formally approved a new loan to Russia of US$11.2 billion. The loan formed part of a US$22.6 billion rescue package to bolster Russia’s depleted gold and hard currency reserves, which had come dangerously close to exhaustion in the second week of July. The IMF’s decision was expected to clear the way for loans from the World Bank and other lenders, who had pledged up to US$17 billion in additional funds for Russia.

By agreeing on the loan, the IMF indicated its approval of the government’s “anti-crisis” program. The State Duma, called upon to approve twenty-five emergency measures, was less enthusiastic. Before recessing on July 17, the Duma passed the bulk of the measures put before it. But lawmakers balked at several particularly unpopular bills. These included a comprehensive five percent sales tax, the levying of profits tax on an accruals basis (that is, on the basis of what has been delivered and invoiced, rather than on what has been paid for in the tax period concerned) and increases in individual pension contributions, value-added tax (VAT), land tax and individual income tax. Premier Sergei Kirienko said that the parliament had–by its refusal to take unpopular decisions–reduced the government’s revenue-raising potential by a third. President Boris Yeltsin responded by decreeing an increase in land tax and vetoing Duma-approved cuts in profits tax and oil excise tax. His intervention provoked howls of protest from Russia’s oil industry, already hard hit by falling world energy prices. The government, meanwhile, hiked import tariffs by three percentage points and threatened unilaterally to raise the rate of VAT.

The IMF signaled its disquiet at the Duma’s recalcitrance by tagging only US$4.8 billion, instead of the US$5.6 billion originally anticipated, for immediate disbursement. At first, the IMF threatened to cut this first payment by half. It was dissuaded from so stern a measure by chief negotiator Anatoly Chubais, who flew to Washington to plead for leniency. This was a warning that the Fund would not allow Russia to backslide on the tough lending conditions it had set. Investors responded with a display of renewed confidence in Russia’s financial prospects when they agreed to exchange nearly US$6 billion in short-term domestic treasury bills (known by the Russian acronym of GKOs) for longer-term foreign currency bonds (seven- and twenty-year eurobonds). The exchange, undertaken on IMF advice, was aimed at easing Russia’s crushing short-term debt burden.

THE TSAR IS BURIED; YELTSIN CALLS FOR REPENTANCE