Soviet Economy in Peril as Russia Slashes Funding : Kremlin crisis: Yeltsin cuts the federation’s contribution to the nation’s budget by 85%. Gorbachev warns that Moscow faces imminent fiscal collapse.

Russian President Boris N. Yeltsin, in a major confrontation over the future of the Soviet Union as a federal state, has cut his republic’s contribution to the national budget by 85%, threatening the whole country with imminent economic collapse, Soviet President Mikhail S. Gorbachev told the national Parliament on Thursday.

The Soviet Union, consequently, will enter 1991 without a state budget, Gorbachev said, and the government will quickly run out of money for everything from pay for civil servants and soldiers to operating funds for universities, libraries and science labs to old-age pensions and welfare payments.

But the real damage will be to the Soviet economy, which is already disintegrating, as other republics increase prices and taxes to make up for the money that they will no longer receive from the central government in subsidies compensating them for low, state-set prices on their products.

“If we embark on this road, it will destroy everything we have done,” Gorbachev warned the Congress of People’s Deputies. “Everyone would then live by the principle of ‘every man for himself.’ This would mean the break-up not only of the economy but of the Soviet Union.”

For Gorbachev, it is a triple challenge. He must protect, as best he can, the country’s battered economy from further blows. He must fight for his conception of a new relationship between the Soviet central government and the country’s constituent republics. And he must employ his newly enhanced authority as president to reassert his leadership.

Gorbachev angrily accused Yeltsin, who is president of the Russian Federation, the largest of the Soviet Union’s constituent republics, of trying “virtually to break up the country” by pressing its claims to sovereignty--or even to take over the nation, usurping the present powers of the central government.

“We have to follow the laws of the Soviet Union on forming a budget--no one has annulled them, and no one has the right to do so,” Gorbachev told the Congress, which endorsed his position. “I will proceed from this (principle) as president.”

However, as the major contributor to the central budget, financing more than 55% of this year’s expenditures, the Russian Federation has political as well as economic leverage that Yeltsin is ready to use. This week, he cut Russia’s payment to the central government from $256 billion to $41 billion at official exchange rates. Next year’s projected national budget is about $450 billion.

“Russia should know exactly where its money goes,” Mikhail A. Bocharov, chairman of the Russian Federation’s economic council, told the Congress on Thursday. “No one says that you should not have science, but where does the 14 billion in rubles (about $25 billion at official exchange rates) go?

“There can be no solution to this problem except through consensus.”

But Gorbachev replied, “If we continue debating in this way, we will lose two or three months, and all the people will be out in the streets.”

And Yeltsin’s action brought the resignation Friday of the Russian Federation’s finance minister, Boris Fyodorov, who declared that he could not support what he regarded as Russia’s separatist course and the undermining of the whole country’s economy.

Yeltsin, who had sat beside Gorbachev for much of the 10-day Congress, was absent from the closing session on Thursday, traveling to Yakutia, a vast but remote region in Siberia that is a virtual treasure house for Russia with its gold, diamonds and other resources. Temperatures there are currently 60 degrees below zero, but aides joked that Yeltsin would find it more comfortable than Moscow.

The prospects for a compromise are uncertain, although further negotiations will be held in January. Gorbachev and Yeltsin have frequently faced off, but then backed away from the confrontation.

“The question is largely political, not economic,” Georgy Shakhnazarov, a presidential adviser, commented. “Russia is trying to dominate the central government, even become it. Their idea is, ‘He who pays the piper calls the tune.’ ”

While the dispute focuses immediately on next year’s state budget, two broader issues, crucial for the Soviet Union’s future, are involved:

* Will the Soviet Union be largely a confederation of sovereign republics with a weak central government, or will Moscow continue to dominate? Where will the balance of powers lie--with the republics or with the central government? Who will have the principal power to tax?

* How will the Soviet economy be reformed--with a rapid reallocation of assets and breakup of the old economic system or with a phased transition from a state-owned, centrally planned, government-managed economy to one based on market principles and entrepreneurship?

And a third controversial issue--who owns Russia’s vast reserves of oil, gas, gold, diamonds and other natural resources?--remains in the background.

Yeltsin has made clear his determination to ensure that the republics are stronger than the center, that the basis of political power is extensive decentralization and that the instruments of that power, including the authority to tax, are in the hands of the republics.

Gorbachev had hoped to defer these questions until later next year, when negotiations will open on a union treaty establishing a new federal basis for the Soviet Union. Yeltsin’s refusal to sign an interim economic agreement this week with other republic leaders, as well as his threatened cut in funds, deprived Gorbachev of this political breathing space.

Yeltsin has also pressed for bolder, faster-paced economic reforms and become increasingly frustrated by Gorbachev’s hesitation in breaking with the past. By refusing to sign the economic agreement, Yeltsin effectively shatters many of the decades-old economic patterns and forces the pace of change.

In forming its own budget for 1991, Russia’s legislature this week allocated most of what was previously given to the central government for Russia’s own purposes, including the construction of schools, roads and other infrastructure and the development of education, culture, science and medicine under the republic government.

“What are we supposed to do--shut down the army and send all the scientists away?” Gorbachev demanded. “This is not (a serious proposal). I am trying to find parliamentary language to describe all this, but I could use some other words.”

Valentin S. Pavlov, the Soviet finance minister, said that, as worrying as a budget crisis would be, the effect of Russia’s action on the economy as a whole would be more devastating.

An agreement on economic stabilization, accepted by most of the republic leaders this week, would likely collapse and with it the laboriously negotiated compromises intended to hold the Soviet economy together until the next reforms can be worked out, Pavlov said.

As other republics raised the prices of their products to make up for the payments they would not be receiving from the central government, an inflationary wave would sweep across the country, he said. The yearlong contracts that enterprises sign to assure smooth deliveries of raw materials and finished products would then be abandoned. And within weeks the economy would plunge into even greater chaos.

Pavel G. Bunich, a radical economist, said that the issues are so difficult and the approaches so disparate that the only solution might be bringing forward reforms to establish a full market economy. “The only rational thing now is to sit down and count out every ruble,” he said.