Chechen Fight Is a Budget-Buster for Russians

Watch the television footage of the destructive assault on Chechnya and it offers only a hint of the economic damage to all of Russia.

Every round fired from a Russian tank--there are hundreds of tanks and some days the shelling never lets up--costs about $4,200, the price of a mid-size Russian car. Tens of thousands of troops have invaded the secessionist republic, earning triple pay. Bomber pilots burn tons of jet fuel in round-the-clock sorties.

This has been going on for five weeks, at an estimated cost of up to $6 million a day.

Bogged down by unexpected Chechen resistance, the war is bursting Russia’s tight 1995 budget, undermining its effort to stabilize the ruble and clouding the future of Western-aided economic reform here.

There is no letup in sight. But whenever the fighting ends, Russia could face a daunting new expense: rebuilding Chechnya--including its shattered oil refinery, railroad and capital city, Grozny--while resettling more than 350,000 people who have fled the fighting or lost their homes.

Bottom-line cost estimates vary from one government ministry to another. They range up to $1.5 billion to pound the Chechens into submission and as high as $3 billion to help them back on their feet. Most projections assume an early end to the war.

“Obviously, the longer this campaign lasts, the costlier it will be, and the time will come when it will be impossible to sustain our economic stabilization and continue these (military) operations,” Economics Minister Yevgeny G. Yasin told reporters. “At some point, we will have to give something up.”

Yegor T. Gaidar, the economist who launched Russia’s free-market reforms three years ago this month, gave a gloomier assessment. “Another two, three weeks of such spending and we can forget the budget,” he said.

In the big picture of Russia’s economy-in-transition, the budget is only the most immediate of three potential casualties of the war, according to Russian and Western specialists. Another is confidence in the ruble, which can enable the economy to promote savings and start its long-promised recovery. The third is faith in Russian President Boris N. Yeltsin’s commitment to the free market--the factor that guides Western lenders and investors.

For Russians, blowing the budget means higher inflation--the problem, unknown under communism, that has most diminished their support for reform. Budget deficits are inflationary if the government, as it has done each year, prints money to close them. Consumer prices rose 200% last year, 900% in 1993 and 2,600% in 1992.

The arithmetic is straightforward. The government’s original $60-billion spending plan for 1995 falls short of projected revenue by $19 billion, or 7.7% of the anticipated gross national product. Most of that deficit was to be covered by credits from international lending agencies and the rest by sale of treasury bonds, enabling the government to hold monthly inflation to 1% or 2% by year’s end.

But an additional $4.5 billion in spending on the Chechen war would raise the deficit to about 10% of likely GNP, a level unacceptable to the International Monetary Fund, which was close to agreement on a $6.4-billion standby loan to Russia before the war. An IMF mission is due here this week to resume the talks.

“Thanks to Chechnya, we’re back to square one,” an IMF official told Reuters in Washington.

So is Russia. Yeltsin has ordered the Finance Ministry to recalculate the budget, which was adopted in preliminary form by the Parliament last month but still faces a final battle there.

The army is expected to press for additional revenue.

Most lawmakers, not to mention international lenders, are loath to provide new funding for the war. But the army’s many supporters in the Parliament point to the disastrous Chechen campaign and argue that the military and its weapons must be modernized. The Defense Ministry says its $11-billion budget for 1995 isn’t even enough to cover fuel needs.

Yeltsin’s government may try to cut non-military spending, but that would be unpopular. The agrarian lobby is fighting especially hard for more crop subsidies.

Meanwhile, the ruble’s habitual slide has accelerated into a tumble--a sign of heightened expectations of inflation.

The Russian currency traded Friday at 3,776 to the dollar, compared with 3,323 to the dollar when the war began Dec. 11. It lost 52 points in a single day, Jan. 5, and now stands at its lowest level since it crashed in October.

The tumble is partly attributed to a government spending spree last summer that showed up in double-digit inflation for each of the last three months of 1994. But Alexander Livshits, an economic aide to the president, says uncertainty over Chechnya is propelling the fall.

Livshits reports that 85% of factory directors surveyed by the government plan to increase prices in the first quarter of 1995, compared with fewer than half of them surveyed last fall. He cautions that expectations of wartime spending may be exaggerated--a bigger threat to the economy than the spending itself.

“We are now on the brink of inflation caused by panic and fear, inflation by hysteria,” Livshits said in a televised interview. He estimated that the cost of the military campaign, even if it drags on, will not exceed $1.35 billion this year, adding, “It’s a lot, but not enough to bring about an economic catastrophe.”

Inflation would do more than throw off budget calculations; it would also make it harder for the government to sell bonds to finance the deficit.

Far less measurable is the damage to Yeltsin’s identity as a reformer.

Yeltsin appears to have been pushed into the Chechen venture by an increasingly influential “party of war” in his Security Council. These individuals also resist key elements of a free market. The question is how much he still listens to free-marketeers in his government.

Western lending agencies have been alarmed by parallel efforts of hard-line Yeltsin aides in the past month to roll back two key reforms for reasons of national security.

First, Maj. Gen. Alexander Korzhakov, Yeltsin’s security chief, persuaded the government to cancel a move to liberalize the domestic oil market because it would give foreigners more influence over Russian raw materials.

The decision was reversed after the IMF, the World Bank and reformers on Yeltsin’s economic team put pressure on Prime Minister Viktor S. Chernomyrdin.

Then, Vladimir Polevanov--Yeltsin’s new privatization chief, a geologist with no economic experience--called for re-nationalizing “wrongly privatized” industries in the aluminum, energy and military-industrial sectors. He also barred at least 35 U.S.-funded advisers from the headquarters of his agency, the State Property Committee.

But no action has yet been taken to roll back privatization, the most sweeping of Russia’s economic reforms.

“We haven’t seen the end yet,” said Charles R. Blitzer, chief economist for the World Bank in Moscow. “Are these guys who are unfriendly to reform going to emerge from the war with their power enhanced, or is Yeltsin going to jettison them for getting him into this mess? It’s not clear.”

Western investment opportunities in post-Communist Russia have long been impeded by a Wild West atmosphere of organized crime, unstable legislation and official corruption. The image of the Kremlin bungling into a costly war only adds to the climate of uncertainty.

“Everybody is worried about what all this says about Yeltsin and where his government is headed,” said a Western diplomat specializing in economics. “The concern is obviously legitimate, “but I wouldn’t jump to conclusions about this being the end of reform. Yeltsin has made some major slips, but he’s been fairly consistent in his support for economic reformers.”

Even so, warned a U.S. banking official here, the war has clearly weakened Yeltsin’s presidency, and “that’s going to make it harder for him to impose the tough measures needed to balance the budget and keep control of the economy.”