NEWS ANALYSIS : Yeltsin Banks Too Heavily on His Election Promises

By RICHARD BOUDREAUX

June 8, 1996 12 AM PT

TIMES STAFF WRITER

MOSCOW —

In a reelection campaign that reaches for every trick and promise in the book, Russian President Boris N. Yeltsin has managed to steal much of his Communist rival’s thunder.

Under fire for inequities in his privatization program, Yeltsin suspended it. Condemned as the destroyer of the Soviet Union, he patched together a Slavic union with neighboring Belarus. He even hoisted the Communist flag in Red Square--minus the hammer and sickle.

His democratic, pro-market allies have tolerated these forays to the left as campaign tactics from which he can easily retreat if such moves help him win a second term in the June 16 election or a subsequent runoff.

But this week Yeltsin tried to cross a line drawn by the strictest guardian of his reform program, the Central Bank, and met unexpected public resistance.

Thus has Russia’s first democratic ruler shown that to defeat Communist Party leader Gennady A. Zyuganov, he is willing to put two major achievements of his presidency at risk.

One is the defeat of high inflation--now down to an annual rate of 28%, from 940% in 1993. The other is a law that turned the tide in that battle by barring the Central Bank from putting money in circulation to bridge budget deficits and by shielding it from pressures from the president and parliament.

What Yeltsin tried to do Wednesday, in violation of that law, was force the bank to pump nearly $1 billion in inflationary rubles into the economy to help meet his campaign promises.

The money would partially cover a budget deficit and enable him to pay overdue wages to teachers, defense workers and other public employees.

In a rare alliance, the Communist-led parliament approved Yeltsin’s order and went one step further, drafting a law to give itself control over all Central Bank reserves.

“This is the first real challenge to the independence of the Central Bank,” declared spokeswoman Natalia Khomenko, who said the bank’s directors balked at the president’s order and will meet today to consider taking their case to the Constitutional Court.

It is unclear whether Yeltsin will win the showdown and get this money that only the bank can deliver.

What is certain is that the president has over the last four months promised some voters far more than he can deliver and delivered to other voters far more than he can pay for.

The bills, an estimated $6 billion, are coming due, and that spells huge inflationary pressures for the rest of this year for any ruler who sits in the Kremlin.

Russia needs low inflation to attract the investment needed to complete its painful path from central planning to a market economy.

Holding down inflationary deficit spending is a condition for the country to continue getting monthly infusions from a $10.2-billion credit approved in April by the International Monetary Fund.

The three-year credit was timed to help Yeltsin, in effect, buy his reelection from a beleaguered electorate.

Among other things, he has promised to rebuild war-torn Chechnya, reimburse millions of people for savings wiped out by inflation, raise the miserly salaries of teachers and medical workers and create a professional, all-volunteer army.

On the campaign trail, he has given away cars to coal miners, trucks to farmers and federal subsidies to nearly every school, church or veterans group that asks.

But even with the fund’s largess, Economics Minister Yevgeny G. Yasin said this week that the budget had been stretched to the limit.

Tax collection has lagged and the government can’t raise enough from treasury bills. Revenue is a third less than expected.

“The effect of the elections on the economy turned out to be much worse than I expected,” Yasin said.

As a result, Yeltsin was confronted this week with his first choice between ignoring campaign promises, which might cost the election or stir unrest during a second term, and inflationary spending, which would risk scaring away private investment.

By demanding that the Central Bank turn over part of its reserve to fill part of the growing budget gap, Yeltsin chose inflation. But government economists insisted that the proposed cash infusion, while technically a violation of Russia’s agreement with the IMF, is just 1% of the federal budget--too little to speed up the rise in prices.

Independent specialists disagreed, saying the move will create inflationary expectations.

“This is not the way to go, obviously, if you’re trying to reassure people that monetary authorities are keeping a strong hold on the value of the currency,” a Western economist said.

Some said the Central Bank does not have a sure case in court and will probably compromise, giving part of the $1 billion to the budget next week. In that case, they said, the IMF is unlikely to stand in Yeltsin’s way, because that might help the Communists, who oppose Russia’s dependence on IMF credits and would probably default.

“The IMF is keeping its eye on the ball, that ball being Yeltsin’s victory,” said James Fenker, head of research at CentreInvest Securities in Moscow. “It would be worth their risk not to make waves until after the election. They’ve already backed the horse. They might as well see him across the finish line.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Promises, Promises

Over the last four months, Russian President Boris N. Yeltsin in his bid for reelection has promised:

* Low-cost housing loans and more federal housing.

* Debt relief, tax breaks and price supports for farmers.

* Billions in back wages and pension payments.

* Higher wages.

* Bigger pensions.

* More welfare and unemployment benefits.

* Bigger student stipends.

* Compensation for billions in savings lost to inflation.

* A raise for teachers and health care workers.