Russia to Lend Money to Save Factories, Jobs

The Russian government, worried that its tough economic reforms will soon force thousands of state-owned factories into bankruptcy and put millions of people out of work, will lend the money necessary to keep most of the firms in business, the economics minister announced Wednesday.

Andrei Nechayev, an architect of the reforms, indicated that the government has decided to retreat on a crucial element of its economic program, tight financial controls, in the face of the threat of severe and widespread unrest.

“Our situation is verging on serious social conflict,” Nechayev told a press conference in explaining the policy retreat. “We are on the edge of massive financial difficulties in industry.

“We must be very prudent now. We must prevent a further fall in production and massive layoffs, but we also must prevent an enormous growth in credits.”

Described by Nechayev as a “necessary compromise,” the move nonetheless represents a significant dilution of the government’s insistence that market forces in their very ruthlessness are the best way to improve overall economic performance in industry.

Meanwhile, Deputy Prime Minister Alexander Shokhin announced government plans to double the monthly minimum wage and increase pensions and welfare benefits to offset the rising cost of living. Consumer prices are expected to have increased 600% overall in the first quarter of the year, according to government estimates.

The current minimum wage is 375 rubles, about $4 at the current exchange rate.

Yevgeny Yasin, a senior adviser to President Boris N. Yeltsin and a leading industrial economist, added his voice Wednesday to warnings that the fragile economic situation threatens Russia’s political stability and thus dictates a moderation of its reform policies.

“We must help the government in its correct choice of specific measures because the slightest mistake now may lead to catastrophe,” Yasin told the newspaper Komsomolskaya Pravda. “This is inevitable, in fact, if the government continues fanatically to tighten the screws trying to achieve a deficit-free budget.

“If production falls by more than 10% to 15% this year, we will have the collapse of the national economy, the breakup of the Commonwealth of Independent States and the disintegration of Russia itself.”

Nechayev said that losses, totaling more than $2 billion so far, were accumulating all along the production chain, with producers owing money to their suppliers but being unable to pay because demand for their products had fallen sharply with the tripling and quadrupling of prices in January.

“The first step in the reform should be a fiscal improvement reached through a tough credit policy,” Nechayev said, “but we need to find a balance.”

When the government freed most prices from state controls in January, it also ended the subsidies that made up the difference between production costs and the prices that state enterprises were allowed to charge. The intent was not only to rationalize the whole price structure but to force state enterprises to become more efficient under threat of closure.

So many enterprises have proved unable to make the leap, Nechayev said Wednesday, that thousands of firms now face a “solvency crisis,” which in turn could mean an even greater reduction in industrial production this year and a sharper contraction of the whole Russian economy.

In some sectors of industry, such as machine-tool and agricultural equipment, more than half of the enterprises face immediate bankruptcy, and overall the average is more than a quarter of all firms.

More than 40% of Russia’s industrial capacity is now idle, according to government figures, and output is continuing to decline at 12% to 15% a month. As a result of the price increases, retail sales dropped by 50% in volume terms in January compared to a year ago and by 41% last month.

Without a law on bankruptcy, however, the government has found that it cannot close money-losing enterprises, even though it may own them, except through administrative action. And Nechayev said that this would simply perpetuate state control of the economy where there should be other remedies for a firm’s creditors, employees and shareholders.

The new government subsidies will come largely in the form of investment credits of up to $2 billion and for lower interest rates rather than direct state appropriations, Nechayev said. But unprofitable Russian enterprises will nonetheless get much more time to adjust to the new economic strategy.

Most worrisome to the government, Nechayev added, was the sociopolitical impact of the price increases, the enterprise losses and the resulting state budget deficit.

Nechayev said Russia’s economic reforms have received preliminary approval from experts at the International Monetary Fund and the World Bank and that the country should be able to join the two organizations at the end of next month, entitling it to borrow from them and others.