Reforms Periled as Russia’s Legislators Boost Deficit

In a move likely to hinder the Russian government’s pro-market economic reforms, the national legislature Friday passed a 1992 budget that increases the government’s budget deficit to 950.1 billion rubles, or about $700 million.

Russian specialists fear that the lawmakers’ move might become an obstacle to the country’s transition to an economy based on free-market forces of supply and demand.

“I am afraid this is a serious back step on financial policy,” said Mikhail Berger, economics editor for the Izvestia newspaper. “This will heighten inflation and put us at a big risk of losing the money we’re expecting from the West.”

The move also underlined the ongoing struggle for power between the legislature and President Boris N. Yeltsin and his government. Hard-liners in the Parliament pushed through about 100 billion rubles more in spending than acting Prime Minister Yegor T. Gaidar had proposed, thus creating a greater budget deficit.

The International Monetary Fund, which has been negotiating with Russia about what reforms must be implemented in order for the country to receive $24 billion in promised aid, was watching the legislature’s move closely.

“We knew from the beginning that this was going to be an important session,” said an IMF official, who spoke on the grounds of anonymity. “It could have an impact on the IMF’s decision on whether to give Russia aid.”

The official said it would take time for the IMF’s specialists to analyze the new Russian budget and decide if the necessary steps can still be taken to cut inflation to 10% per month and decrease the deficit from 20% to 5% of the gross domestic product by the end of 1992.

However, the official said, at first glance it appears that the Russian legislature has decided to spend more and tax less, which could discourage the world’s financial powers from supplying Russia with aid.

Just a day earlier, Parliament lowered the value-added tax on food from 28% to 15% but kept the tax at 28% for other consumer goods. This was a compromise between legislators and Gaidar, who warned that a sharp decrease in the value-added tax would result in hyper-inflation.

The unknown variable, the IMF official said, is the quantity of money injected into the economy over the next few months. On Friday, the legislature appointed a new head of Russia’s Central Bank, Viktor Gerashchenko, to replace Georgy Matyukhin, who resigned from the post for “health reasons.” It was not clear yet what kind of monetary policy the new Central Bank chief will pursue.

Also on Friday, the Russian government adopted a program to try to attract foreign investment. Russia will need at least $5 billion annually for the next three years to fuel its transition to a market economy.

The plan envisages creating tax incentives, lowering duties and creating legislation to govern foreign investment in 1992.