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Russia's Flagging Economy Threatens Ties with West

High taxes, prospects of massive unemployment could spark unrest

As Russia's industrial collapse intensifies, government support seems to be eroding for tight-money policies aimed at containing inflation.

The seriousness of Russia's economic situation became apparent last week, just a few days before President Boris Yeltsin paid a three-day visit to Germany. Statistics released by the Economics Ministry showed industrial production plummeted 25 percent during the first quarter of 1994, compared to the same period last year.

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The Economics Ministry also warned that tax revenues were reaching levels that could spark social unrest if the negative economic trends continued.

Faced with the grim figures and the prospect of massive unemployment, the men in charge of reforming Russia's economy are sending mixed signals, with some indicating they may be willing to abandon the austerity-minded reform course that has brought the monthly inflation down to around 9 percent. Last year the inflation rate fluctuated between 20 percent and 30 percent per month.

The decisions made by Prime Minister Viktor Chernomyrdin's Cabinet in the coming weeks could have a wide-ranging impact on Russia's relations with the West. Most Western governments and international monetary institutions, such as the International Monetary Fund, have made aid efforts conditional on Russia's ability to demonstrate fiscal responsibility.

``Inflation remains one of the scourges ... but we shouldn't overdo things in the battle against inflation,'' Economics Minister Alexandr Shokhin told a conference of Russian and foreign economic experts in Bonn on May 12. ``This is a lot,'' added Mr. Shokhin, referring to the 25 percent production plunge. ``For that reason, we must rethink the anti-inflation course.''

If Mr. Chernomyrdin's government veers off the present course, it could seriously hamper Russian efforts to attract international assistance and investment, a crucial component to economic restructuring.

The Russian tight-money policy of the last eight months, initiated by former Finance Minister Boris Fyodorov, has turned off the spigot of soft government credits to state enterprises. Those credits had allowed many unrepentant factory directors to keep operating under outdated Communist-era methods during the first year-and-a-half of economic reforms. The credits were the main cause of the high monthly inflation rates of 1992 and 1993.

Now, many enterprises are facing the nasty choice of either restructuring or going into bankruptcy, and are lobbying the government for financial bailout packages. So far, Chernomyrdin has resisted reopening the credit pipeline. But the Cabinet's will to continue the tight-money course appears to be wavering.

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In Moscow, Finance Minister Sergey Dubinin last week said current policies would continue, predicting that monthly inflation could go as low as 5 percent by the end of 1994.

But in Bonn, Economics Minister Shokhin indicated that he now considers the support of industrial production to be a higher priority than the fight against inflation. That could mean the return of soft government credits, but Shokhin insisted that ``noninflationary'' methods could be used to bolster ailing state enterprises. He also said Russia must step up tax collection efforts. Government figures show only 3.4 trillion rubles (about $2 billion) in tax revenue ended up in state coffers during the first quarter of 1994. That figure is 15 percent lower than the government had predicted in its budget projections.

``Our enterprises operate in a poorly controlled environment,'' Shokhin admitted. Many enterprises, especially those in the growing private sector, are dodging taxes, officials say.

A moderating influence on the government's credit policy could be its need for foreign trade and investment.

Mr. Yeltsin spent a good portion of his German visit trying to drum up support in the German business community for Russian development projects.

Germany has been the largest Western aid donor to Moscow. But the Germans, saddled with the higher-than-expected cost of reunification, gave Yeltsin's investment overtures a reserved reception. A new bout of government credit-fueled inflation in Russia could further dampen investment desires.

Shokhin, meanwhile, has high hopes for a partnership agreement between Russia and the European Union aimed at lowering trade barriers by the end of the century. EU foreign ministers will meet in Brussels today to discuss the pact. Greater access to European markets would help boost Russian exports, which in turn would keep factories running and workers employed, Shokhin said. If EU ministers approve the agreement, a decision on whether to introduce a free-trade regime with Russia would not be made until 1998.

Moscow also has been lobbying hard for the expansion of the Group of Seven (G-7) industrial nations to include Russia. While in Germany, Yeltsin said Russia's great power status mandated its full membership in the club of industrialized nations.

Russia, as it stands now, will participate in political discussions during the upcoming summit of the G-7 - which includes the United States, Canada, Britain, France, Germany, Italy, and Japan - to be held in July. But it will not be represented during the economic portion of the meeting.

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