TWO TONS OF CANARIES:

Five months have now passed since Russia’s devaluation and default, and the news has been all bad. Why should this week be different? The government still has no coherent plan for economic stabilization, at least none which it has articulated. There is a draft budget for 1999, but despite its unrealistic assumptions it is under attack as insufficiently fanciful. The economy continues to shrink while public services deteriorate or, in parts of the country, simply cease entirely. Another crisis may not be many months away.

The government’s budget proposal, drawn up in December, was advertised as honest and austere. Austere it is, with total spending a meager US$185 per capita. Honest it is not, assuming revenues which are most unlikely to come in and an exchange rate for the year which neither the market nor the Central Bank is likely to support for more than another week or two.

The budget will face the second of four required votes in the lower house of the legislature–the Duma–sometime this week, probably on January 19. In the last few days it has taken shots from all sides. The communists demand more spending on science, education and defense. The centrists want more for security (the ministries of defense and interior), social benefits and transfers to poorer regions. Aleksandr Lebed, the retired general who now is governor of one of Russia’s largest regions, says the budget gives too much control to Moscow and alienates the regions from the center.

Deputy Prime Minister Yuri Maslyukov returned to Russia ahead of schedule to deal with these complaints. Maslyukov had been in Washington for meetings with the International Monetary Fund (IMF) and the World Bank, institutions listed in the budget as providers of $5.2 billion in new loans in 1999–no less than 20 percent of planned revenues. The Fund and the Bank told Maslyukov the draft budget is too optimistic and gave him no reason to believe any new money would be forthcoming. An IMF mission is set to arrive in Moscow January 20. The IMF may be willing to discuss a new economic program, a senior Fund official said, but the agreement reached last year is “history.”

If the budget moves as quickly as possible through the legislature, it could be enacted into law in February. That would be a political achievement for the government, but the scramble for revenue does not depend on the budget’s passage. Last week the government by decree imposed a five percent export tax on natural gas, fuel oil, coal, nickel, refined copper, and a few other basic commodities–but not (yet) on crude oil. The tax, which should be relatively easy to assess and difficult to evade, is expected to raise a billion dollars over the next six months. Whether or not the budget passes, similar measures can be expected.

The hard currency shortage is acute. Reserves are down to $12 billion, of which about $4.7 billion is said to be in gold. Russia is scheduled to pay $8.3 billion on its foreign-currency debt in the first half of 1999, and $17.5 billion in the calendar year, but the draft budget allocates only $4.6 billion for this purpose.

So whom to stiff, and whom to pay? The government says it will not provide timely service on old Soviet debt but will pay Eurobonds issued by the Russian Federation. Rating agencies calculate the interest on those bonds at $1.66 billion. Adding interest of $1.29 billion and principal of $3.41 billion owed to the IMF and the World Bank, the total of $6.36 billion exceeds the budget allocation. Someone–perhaps the international financial institutions–will come up short. The Central Bank is like the driver of the one-ton truck carrying two tons of canaries: To avoid a breakdown, he has to keep half of them flying.

“Separatist tendencies” … “We have to stifle, liquidate, root out separatist tendencies,” Prime Minister Yevgeny Primakov told regional leaders in Siberia last week. “We lost the Soviet Union, we will not allow Russia to be lost.” Bold words, and no doubt heartfelt, but the prime minister offered no plan to reverse the drain of power away from the tapped-out central government.

Centrifugal forces are strongest in the northern Caucasus, where in 1994 President Boris Yeltsin launched a war against separatists in the ethnic republic of Chechnya. After two years of fighting, General Aleksandr Lebed, in his brief stint as the head of Yeltsin’s National Security Council, negotiated a truce which denied the separatists independence but failed to reassert Russian authority. Lebed, now governor of the enormous Siberian state of Krasnoyarsk, said last week that a “bloody and massive” conflict in the northern Caucasus is increasingly possible. The region, he said, is sinking into “medieval barbarism” and the Russian government has no policy to address the problem. Like Primakov, however, Lebed had nothing concrete to propose.

The turmoil in the Caucasus justifies Primakov’s concern and Lebed’s language. Recent events include the death of a Stavropol policeman in a shootout with kidnappers on January 9; the kidnapping of an aide to the president of Ingushetia on January 11; and the abduction of the nine-year-old son of the head of Chechnya’s main power utility, in Stavropol, also January 11. The nine-year-old’s brother had been kidnapped a year ago and ransomed for $100,000. In more clearly political incidents, leaflets demanding Russian withdrawal from Dagestan appeared on Russian military bases in the region, signed by Islamic groups based in Chechnya.