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1998 In Review: Russia's Economic Collapse

  • Floriana Fossato

Moscow, 18 December 1998 (RFE/RL) -- Russia's economic landscape at the end of 1998 is a desolate one. In the wake of August's financial collapse, the government's coffers are virtually empty. There is no money to service loans taken out to meet basic state obligations. Nor is there enough money to pay back wages and pension payments to Russia's impoverished population. Inflation continues to grow.

Cautiously optimistic economic forecasts for next year, issued by the new government of Prime Minister Yevgeny Primakov, have been criticized as politically motivated. Critics say the forecasts are aimed at attracting much needed Western financial aid and placating frustrated domestic constituencies.

Primakov says his Government wants to rebuild both foreign and domestic trust in Russia's economy and financial system, shattered after the August meltdown. But economic analysts say the draft 1999 budget recently produced by the government is unrealistic. They say it assumes that Russia will obtain new loans from the International Monetary Fund and other international institutions, even though IMF officials have repeatedly indicated that no additional money will be provided until Russia puts together a credible economic recovery plan.

Legislators are willing to help Primakov's government to an extent they never shown previously. But many of them, too, also express doubts about the draft budget. State Duma Deputy Speaker Vladimir Ryzhkov says that the budget could "crumble, like a castle of sand."

In August, former Prime Minister Sergei Kiriyenko's reformist government brought about its own downfall by devaluing the ruble, defaulting on some debts and introducing a 90-day moratorium on foreign debt payments. During its five months in office, the Kiriyenko government had made several frantic attempts to stave off the crash. Kiriyenko repeatedly said that Russia should finally learn, in his phrase, to "live by its own means." But the slogan was ignored when a brutal political fight, fueled by financial tycoons with influential political ties, began to intensify along with the economic crisis.

Russia subsequently defaulted on 281,000-million ruble-denominated treasury bills and bonds. (That was the equivalent of $43 billion in August and, by year's end, nearly $14 billion, as the ruble fell from six to nearly 21 to the dollar.) Following the financial collapse, Russia's banking sector lost liquidity, payments and salaries were blocked and many Russians, who had timidly started to trust their banks, lost their savings.

Within one week in August, not only did the reformist government disappear, so in effect did the stock market. In two weeks' time, the ruble lost two-thirds of its value. Many of the country's banks turned into empty glass fortresses. Others are being saved by the new government, with little regard for private depositors' losses.

Next year, analysts say, Russia may default on $17.5 billion in outstanding payments on its foreign debt, including some $1.7 billion in Eurobonds. That would make it the first nation in world history to default on government-guaranteed securities sold abroad.

The Government and the IMF are involved in continuing talks on whether Moscow can pay its debts in full and improve its finances. Their outcome will determine whether the IMF provides additional loans. On both sides, the phrase "fiscal discipline" is repeated like a mantra, but officials involved acknowledge that the chances of Russia radically improving its finances in the coming year are nil.

It's worth recalling that during 1996 and 1997, Russia's economy had begun to show signs of growth. This occurred despite widespread tax delinquency, pervasive capital flight, vitriolic quarrels among the country's oligarchs and the failure of international financial institutions to come up with timely assistance during Moscow's first attempts at radical reform.

So what were reasons for the collapse in 1998? The first reason, many analysts say, was the broader international meltdown that wiped out emerging markets in Asia and produced a global financial crisis this year. In addition, they point out, international prices for oil, gas and metals --all major Russian exports-- sank to record low levels. That spelled disaster for a country in which oil and gas production accounts for about one-third of all domestic taxes and for more than half of foreign-currency revenues.

World prices on metals and other commodities Russia exports in large quantities also fell dramatically. Many in Moscow believe that the drop in commodities prices was the single biggest cause of Russia's economic collapse as, they say, was the case in the Soviet Union during the 1980s.

But international experts believe the major cause for the collapse lies elsewhere. They say that the huge debt Russia inherited from the Soviet Union spiraled as a result of additional borrowing by Russia. That, they argue, created a sort of a pyramid that eventually imploded when, because of increasing evidence of widespread corruption and incompetent corporate governance, confidence in Russia began crumbling.

John Odling-Smee, director of the IMF department that deals with Russia, wrote recently that the massive amounts of international financial support given to Moscow unfortunately reinforced the feeling in Russian political and financial circles that the economy could be successful without deep structural reform. Odling-Smee also saw as a big factor in the collapse the millions of dollars that private investors in both Russia's equity and bond markets poured into the country. He said the private investment induced some Russian politicians to believe that the reform effort, in Odling-Smee's words, "could be abandoned altogether, since sufficient finance from private sources was readily available with no strings attached."

As the year ends, there are three sets of debt-restructuring talks going on. The Government has appealed for restructuring and refinancing both Russian and Soviet debt. More important, Russia is negotiating new credits with the IMF as well as the refinancing of an estimated $4.8 billion due in repayments to the fund in 1999. Unlike other international debts, those to the IMF cannot be renegotiated. So, if Russia defaults on its obligations to the IMF, it will join the ranks --and attain the perceived risk level-- of some African countries.

Primakov has brought a small measure of economic stability since he took office. But many old bad habits, rejected by the previous reformist government, are back again. In 1997, President Boris Yeltsin banned barter trade between private companies and the government because it was seen as inflationary, inducing corruption and a way to avoid structural reform. Today, the Government has returned to barter to provide fuel and food to some needy Russian regions.

Thus, the huge gas monopoly Gazprom has agreed to receive food and other produces from countries, notably Ukraine and Belarus, that cannot pay for their gas imports from Russia in cash. The company transfers these barter payments to the Government, in exchange for the partial canceling of its tax arrears.

This year graphically pointed up the ineffectiveness of Russia's fiscal system. The Government is totally unable to collect taxes, particularly from politically connected corporations such as Gazprom. It rejected the previous government's attempts to collect monthly tax bills of 4,500 million rubles per month from Gazprom. Now, when the country is having difficulty providing food and fuel to some regions, Gazprom is partly paying tax bills in barter. This is welcomed by the Government

With the economy less money-oriented and tax accountability less detectable, barter has once again become a widespread practice. According to official data, barter now accounts for 80 percent of all transactions in Russia's official economy. Gazprom and another large company, Unified Energy Systems, say they collect only 15 percent of their revenues in cash.

Still, the Primakov Government has acted better than initially feared. It has not resorted to the printing of large amounts of money, which would have led to hyper-inflation. Primakov says there will be no (what he calls) "uncontrolled" printing of money to pay international and domestic debts next year. But this month, the Duma passed a bill authorizing the printing of 25,000 million rubles before the end of the year. The hope is the money will be used to pay wages and pensions.

The 1999 draft budget estimates inflation next year at 30 percent. Some economic analysts say that the best Russia can hope for is a rate of 60 to 70 percent. Despite this and other pessimistic forecasts, the country and its people are muddling through. With difficulty and pain, Russians continue to try to make ends meet and to

(First of a two articles on Russia)