Russia Slashes Defense Budget : Austerity: The allocation for arms purchases will be trimmed by 87%. Legislators approve the cutbacks in an effort to eliminate the deficit and stabilize the economy.

The Russian government, fighting to stabilize its collapsing economy and end runaway inflation, won legislative approval Friday for an austere budget that almost eliminates the chronic deficit by slashing defense spending. Allocations for arms purchases alone, for example, will be cut by 87%.

Deputy Prime Minister Yegor T. Gaidar told lawmakers that only through a balanced budget, with sharp reductions in government subsidies to inefficient state enterprises, could Russia move from a state-controlled to a free-market economy.

But Gaidar acknowledged that the tough measures will bring even more pain, including Russia’s first serious unemployment, to a nation where prices for food and consumer goods have just tripled and inflation is running at 400% a month.

Warning that the alternative is financial collapse, Gaidar said that the budget cuts are also necessary for Russia to receive the international assistance it needs for the economic transition--and simply to survive the winter.

“I am not trying to frighten you--I am just informing you of the realities of life,” he said as he won grudging approval from the Supreme Soviet, the Russian legislature, for the government’s revenues and expenditures for the first quarter of the year. Further budgets will be introduced later as the economic situation evolves.

The primary cuts were made in defense spending, Gaidar said, as Russian President Boris N. Yeltsin put his country’s economic survival ahead of military security in a dramatic shift in national priorities.

As approved by the legislature, military spending will be reduced from the average of 22% to 25% of the old Soviet Union’s gross national product to 4.5% of Russia’s. (By comparison, the percentage of the American gross national product spent on defense is roughly 5.5%.)

Further reductions were made in state investments and in the financing of projects in other countries (largely the now independent former Soviet republics) unless they promise an immediate return, Gaidar said.

Debate was heated as deputies called for enlarged social welfare programs to help the poor cope with this month’s price increases, for continued subsidies to state enterprises and for greater allocations for the armed forces.

Alexander Pochinok, chairman of the legislature’s budget committee, demanded a 65% increase in expenditures proposed by the government to “make up for the growth of prices, above all in agriculture, health care, general and higher education, mass media and other spheres.” The government should look for new sources of income, Pochinok argued, rather than cutting so deeply into programs developed over decades.

And he mocked Gaidar’s first effort at formulating the government budget, saying “the quality and level of the submitted documents are insufficient to call them a budget.” Many important but specialized funds have been excluded, Pochinok said, and, thus, the true level of government spending is hidden.

But in the end, lawmakers approved a budget of 420.5 billion rubles; of this sum, only 50 billion rubles will go toward defense spending.

The ruble at the new official rate of exchange is worth about 2 cents, putting the Russian government budget for the first quarter of the year at the equivalent of $8.4 billion; at the market rate exchange, used for trade and by tourists, the ruble is worth less than 1 cent, and the budget would amount to about $4 billion. The ruble is not freely convertible to other currencies.

Gaidar, 35, who was appointed by Yeltsin to lead Russia in its forced march to a free-market economy, told the deputies that it was necessary to adopt an “extremely austere and conservative” budget to control inflation and stabilize the economy, saying: “The Russian government has only one option left to achieve stabilization--sharply curbing the growth of money supply and countering the avalanche of hyper-inflation with a very tough financial and monetary policy.”

With this budget, Gaidar said, the government envisaged a deficit of only about 1% of the Russian gross national product, the value of all a country’s goods and services in a year. In 1991, the Soviet budget deficit amounted to 17% to 18% of the GNP; last November, the deficits of the central and republic governments totaled more than 400 billion rubles.

Although warned by many economists of the danger of inflation and growing debts, the Soviet Union had run mounting budget deficits for more than a decade, generally in the range of 5% to 11% of GNP. (By comparison, the U.S. budget deficit has averaged 3% to 4% of GNP in recent years.)

Also, Kremlin officials often hid the size of the deficits for years by counting the sale of bonds as revenues rather than borrowings--then arranging additional loans secretly from the State Bank.

Even with such a tough budget, Gaidar said he expects inflation to run at 400% per month over the first quarter. following a lifting of price controls on Jan. 2 when the government end subsidies for most goods.

Gaidar, who described his inflation estimate as “extremely conservative,” defended the controversial price increases as “the only possible and responsible decision. Any other policy could have been extremely dangerous, dooming us to an automatic twist in the inflationary spiral,” he added, arguing the need to keep state spending within its revenues.

The economy shrunk by at least 11% last year, Gaidar said, and is likely to contract “an equally catastrophic 19%” in the first quarter of this year.

Ruslan Khasbulatov, the chairman of the Supreme Soviet who has been sharply critical of the way that the government is carrying out economic reforms, said--with great irony--that the vote “showed great confidence in the government and in the president.”

Russia’s dependence on foreign aid gave it little choice but to adopt stringent austerity measures, Gaidar said, because many donors require the government to demonstrate its continued commitment to fundamental reforms with such measures. As an example, the country depends on grain imports, all bought with Western credits. Without these, he said, “the people could be left without bread in March or April, and the government would have no chance to prevent chaos.”