Russia Acts Against Inflation, Shifting From Industry Focus
THE Russian government is taking emergency measures to stave off hyperinflation, but its chances for success are threatened by deep policy differences among the Cabinet, the Central Bank, and parliament.
Combating inflation has become the government's top priority, Deputy Prime Minister Boris Fyodorov said at a news conference Wednesday, adding that tight fiscal policies are planned to cut the money supply.
The announcement signals a major shift for the government of Prime Minister Viktor Chernomyrdin. Since becoming premier in December, Mr. Chernomyrdin often said the government's top priority was stopping the fall in industrial production. The collapse of industry was the primary reason for Yegor Gaidar's replacement by Chernomyrdin, who takes a go-slow approach toward reforms.
But if loose monetary policy is not immediately reversed, the nation is headed for catastrophe, Privatization Minister Anatoly Chubais says. He estimates inflation, which was 25 to 27 percent in December, at 50 to 60 percent this month - a level of hyperinflation that he says will prompt capital flight.
There are several large obstacles Mr. Fyodorov - who is in charge of economic reform - will have to overcome if he is to implement tight monetary policies, some Russian economists say.
Officials, such as First Deputy Prime Minister Vladimir Shumeiko, have played down Cabinet rifts between pro-Gaidar radical reformers and the cautious allies of Chernomyrdin. At a recent press luncheon Mr. Shumeiko insisted the Cabinet is working together, saying the ministers all support the move to a market economy.
But Fyodorov confirms sharp differences among ministers over reform tactics, saying the tight money policy was approved following a "heated discussion" during a Cabinet meeting. Another sign of discord within the Cabinet was the decision earlier this week to lift price controls, implemented by Chernomyrdin on Jan. 5.
"We don't have a government that's functioning as a single team," says Rair Simonyan, an economist at Moscow's Institute of International Economics and International Relations.
Russia's Central Bank and parliament are strong opponents of tight money policies. Central Bank Chairman Victor Gerashchenko has been an outspoken advocate of increasing credits to industry. Fyodorov says he will pressure the Central Bank to restrict the money supply.
Meanwhile, parliament's decision this month to increase the minimum pension by roughly 90 percent, to 4,200 rubles (about $9) monthly, could have a ruinous effect on the government's monetary policies, Finance Minister Vasily Barchuk says.
Fyodorov's ambitious austerity plan aims to cut monthly inflation to 5 percent by the end of the year and Russia's budget deficit to less than 5 percent of the gross national product. The International Monetary Fund and other creditors have insisted Russia meet such stringent targets if it is to receive large-scale financial aid.
Stabilizing the Russian ruble is the key, Fyodorov says. Currently the ruble is at an all-time low of 493 to the US dollar.
He also says credits to industry will be drastically curtailed, though the government will not allow wide-scale bankruptcies because it does not possess the means to handle mass unemployment. Administrative methods may be used to turn failing companies around.
"It's the privilege of the state to reorganize enterprises and replace the managers who are used to living an easy life by lobbying for credits," Fyodorov says.
Other measures in Fyodorov's program include raising interest rates to encourage savings, establishing quarterly budget deficit ceilings, and issuing government bonds to provide additional finances.