Russian Premier Shifts Support to Free Market

Russia’s new prime minister, in a remarkable conversion to free-market beliefs, acknowledged Thursday that the threat of hyper-inflation is a “greater evil” than unemployment and announced a program to restrict subsidies to failing state-owned industries.

The plan, which would slash the state’s inflationary budget deficit and force many enterprises into bankruptcy, marked a swift comeback for free-market reformers, who feared they had lost control of the government last month when their mentor, Yegor T. Gaidar, was ousted as acting prime minister.

Viktor S. Chernomyrdin, the Soviet-era industrial bureaucrat who replaced Gaidar on Dec. 14, took office with a clearly stated priority, applauded by a growing populist and conservative opposition, to reverse Russia’s steep decline in industrial production.

But in his first policy speech Thursday, Chernomyrdin stood before the lawmakers who had elected him and, to the dismay of many, declared: “State regulation has outlived its usefulness.”

“Which is the greater evil, industrial decline or unrestrained price growth and inflation?” he asked rhetorically at another point. “The answer is simple. The former is bad and the latter is very bad. The principal threat we face today is hyper-inflation, which is leading us to catastrophe.

“We must curb inflation first and begin to tackle other pressing problems later,” he added.

His economic plan, drafted by reformist holdovers from Gaidar’s Cabinet, calls for “measured, strict financial and monetary policies” aimed at dampening prices, which have risen close to 50% in January, twice the monthly rate of late 1992. Economists regard 50% as the threshold of hyper-inflation, when consumers lose confidence in the national currency and resort to barter.

Reformers in the Cabinet, backed by Western creditors and financial advisers, have spent this month arguing to Chernomyrdin that such a milestone would weaken not only the ruble but also President Boris N. Yeltsin’s capacity to control the vast, multiethnic Russian republic by democratic means.

As if to echo the warning, Russians behaved this week as if something cataclysmic was about to happen. They traded in their rubles en masse after the Central Bank announced Monday it would introduce new ruble bills without the portrait of Soviet founder V. I. Lenin. Their fear that the old bills would be instantly invalidated proved unfounded, but the ruble tumbled to a new low on Moscow’s currency exchange, from 493 to a U.S. dollar to 568 in a single day’s trading Tuesday.

Speculative buying by others eager to dump excess bills created shortages of rye bread, flour, macaroni, cereals, salt, cabbage and matches in some cities, Moscow newspapers reported. Butchers jacked up the price of a kilogram of beef, from 500 to 1,300 rubles, one-tenth of an average worker’s monthly salary.

Chernomyrdin admitted Thursday that his first economic decree, issued New Year’s Eve and aimed at controlling prices by limiting producers’ profits, was unenforceable. “We overestimated our strength,” he said. “State regulation . . . is not the right way to fulfill this task.”

Reform advocates said it is equally unclear whether Chernomyrdin can succeed with free-market policies. The program he outlined Thursday is similar in many ways to the one Gaidar tried, but failed, to implement over the first 11 months of the post-Soviet era.

The new government says it intends to cut spending, raise taxes on income and profits and set quarterly ceilings for the budget deficit. Finance Minister Vasily V. Barchuk said the 1993 deficit should be cut to one-fourth its 1992 level, to $3.95 billion, about 5.15% of gross national product, matching a target set by the International Monetary Fund.

Chernomyrdin promised that spending cuts will not undermine “minimal services” in health care and education or special efforts to build new housing. Interest rates will be doubled to bring them in line with the current rate of inflation.

But he warned that the Central Bank’s wholesale bailout of indebted companies, a practice that pumped trillions of inflated rubles into the economy last year and wrecked Gaidar politically, was over.

Government loans will no longer be “doled out depending on the pressure exerted by industry directors,” the prime minister said. Now that Russia has a bankruptcy law, some state-owned factories with big losses and unpayable debts will be forced to reorganize under new managers.

Subsidies will go instead to specific projects in high-priority industries--agriculture, energy production and transportation--and to military enterprises converting to civilian production, Chernomyrdin said. The government will also move more aggressively to prop up the ruble until a drop in inflation makes it freely convertible with other world currencies.

Economy Minister Andrei A. Nechayev told lawmakers that the shakeout will not turn the economy around this year, only slow its decline. He targeted a 7% drop in industrial production, compared to 19% last year.

Some lawmakers in the Supreme Soviet greeted the new prime minister’s speech with hostility.

“The Congress rejected the policy of shock therapy and gave the (Gaidar) government a vote of no confidence,” conservative lawmaker Vladimir Tikhonov said. “But we see that the policy of shock therapy is still being pursued.”

Sergei Baburin, a leader of the largest right-wing group in Parliament, said the prime minister’s plans were too vague, that people were getting impatient for results and that a no-confidence motion could come as early as next month.

Chernomyrdin responded with the same “narrow path” metaphor Gaidar used in his last-ditch defense of reform last month.

“Our possibilities are very limited,” the prime minister said. “We have to go down a very narrow path, taking special care not to fall into the abyss of hyper-inflation.”