ABSTRACT
The bases for restoring fiscal and monetary stability in Russia were not established by July 1, 1992. During the whole period of his tenure in power (1985–1991), Mikhail Gorbachev and his cabinets resorted to excessive deficit-spending. They followed the example of the Brezhnev Administration of counting emissions of credit by the U.S.S.R. State Bank (Gosbank) as revenues. However, the earlier government had limited its deficits to 2–3 percent of gross domestic product (GDP). After changing from a unitary state budget system to a decentralized federal one in 1991, the central and republic ministries increased the deficit to 26 percent of the total budgets. Emission of currency in 1991 reached twice the rate of 1990. Partial reforms designed to move to a market economy had undermined the controls of the centrally planned economy (CPE). The result was fiscal and monetary destabilization of the U.S.S.R. in 1991.
On January 2, 1992, the Yeltsin-Gaidar government of independent Russia made a dramatic break with the past gradualist approach to market-oriented reform by freeing most prices and enacting a very austere budget. Deep-rooted vestiges of the old CPE system distorted the outcomes of the reforms in an undesired direction. By July, 1992, deficit-spending approached 17–20 percent of GDP, not the target of 5 percent set after consultation with the 197IMF. The Central Bank of Russia (CBR) has extended massive credits to the government and the economy. Galloping inflation already projected to be from 1,000 to 1,800 percent for the year is threatening to turn into hyperinflation. The goal of reducing it to 9 percent by December seems unattainable. Future waves of rapid price increase are ensured as oil prices are to be raised in stages to world market levels. To pay wages, commitment has been made to septuple the currency during the year. Two and one-half trillion rubles in unsettled inter-enterprise debt caused most enterprises and commercial banks to be technically insolvent. Producers through debt had escaped hard budget restraints and the compulsion to drop prices to meet demand. Diversity in the fiscal policies of the independent members of the Commonwealth of Independent States (CIS) disrupted relations within the ruble zone and helped to undermine the value of the ruble. Russia has reason to blame others for failure to pursue strict budgetary and credit policies, but its own fiscal and monetary instability is a major cause of the breakup of the “common economic space” now under way.
Following the appointment in mid-year of ministers representing the industrial elite, a new 260-page program has been designed to push through broad structural reform by 1996 to deal with distortions caused by remaining vestiges of the old CPE system. Commitment to shifting to a market economy remains firm. However, fear of a catastrophic collapse of industry and of popular reaction to the sharp drop in standard of living has led to costly decisions. In particular, issuance of massive bank credits fundamentally violates the IMF conditions limiting deficit-spending. Key Russian officials have now recognized that it will not be possible to establish full convertibility of the ruble before the beginning of 1993 at the earliest. With the economic recession still deepening, that deadline appears to be very optimistic.
