NEWS ANALYSIS : Borrowing Trouble for Russia?

President Boris N. Yeltsin has wagered Russia’s economic stability in a gambler’s quest for a second term in the Kremlin--a risk his breathless gurus are guessing he will get away with as long as the high-stakes campaign pays off with his reelection.

When Yeltsin seized $1 billion in Central Bank profits earlier this month after a crowd-pleasing spending spree, he made clear how desperately short of cash the government’s coffers are.

Reckless borrowing from domestic creditors, at interest rates as high as 215%, is also being criticized by allies and opponents alike as tantamount to an unauthorized advance against what is expected to be an investment boom should he win on Wednesday.

Government economists insist that there is little chance of economic collapse between now and the presidential election finale and that the boosts anticipated to materialize after a Yeltsin victory will more than cover the president’s bets.

But those outside the incumbent’s confident inner circle see his financial maneuverings as a mortgaging of the market economy on the shaky collateral of his political fortune.

If Communist Party challenger Gennady A. Zyuganov should win in what is still considered a too-close-to-call runoff, they say Yeltsin’s recent spending and borrowing sprees would hasten an economic disaster.

“What he’s doing is highly irresponsible,” said one Western diplomat familiar with the administration’s financial maneuverings. “If he loses, he will be leaving behind a time bomb, and he doesn’t care because he can blame whatever happens on the Communists.”

Most investment analysts join the Kremlin economic advisors in excusing the president’s costly campaign promises as necessary actions to avert the bigger crisis of a new era of inept state domination. Because the analysts’ own futures would be at risk should voters choose the more protectionist, inflationary policies of the Communists, few are willing to criticize Yeltsin’s go-for-broke strategy.

“I regard the election spending as blips on the screen, to accommodate necessities,” said Marc L. Holtzman, president of MeesPierson EuroAmerica investment bank.

In the course of the two-month election campaign, Yeltsin has promised to raise wages, pensions and student stipends; to lower taxes; to excuse debts; to rescue failing industries such as coal-mining and defense research; to make Siberia an industrial powerhouse in less than a decade; and to offer low-cost government loans to every young family in need of housing.

Campaign-season spending to pay back wages to government workers and to compensate the elderly for savings ravaged by inflation has already set off a liquidity crisis that has forced the government to auction treasury bills at staggering cost to raise enough cash for day-to-day operations.

Yeltsin also orchestrated the takeover of $1 billion in Central Bank profit to keep the government afloat. Central Bank officials condemned the seizure as inflationary and a threat to the stability of the ruble, but Chairman Sergei K. Dubinin told journalists that the controversy was about the “improper manner” in which the government demanded the funds from the ostensibly independent bank.

“The state is borrowing too much and the political risks are too high,” conceded Sergei A. Vasiliev, head of the government Center for Economic Reforms, who chastised Yeltsin but insisted there will be little long-term economic damage unless the incumbent loses.

“After the elections, the state will have to diminish borrowing to bring interest rates down to more reasonable levels,” Vasiliev said, noting that the astronomically high returns promised on three-month treasury bills will, come fall, come back to haunt whichever government is in power.

The huge interest rates also mean the government cash crisis has affected the entire industrial sector. “Working capital is being sucked away from the enterprises by the high treasury bill rates,” Vasiliev explained, noting that the diversion of funds has been worsening a production slowdown.

He believes corrections would occur swiftly after a Yeltsin victory, as investors, both foreign and Russian, regain confidence about Russia’s economic future. Vasiliev predicted the return of at least $5 billion in capital by the end of the year as those who took their fortunes out of the country for safekeeping begin to feel relief from the threat of a Communist comeback.

But other economists foresee an unavoidable hangover after the campaign spending binge.

“I don’t think any economist doubts there will be difficulties in the autumn,” even if Yeltsin secures a second term, says Grigory A. Yavlinsky, a liberal economist who made an unsuccessful bid for the presidency and is now being courted by Yeltsin. “It is enough to look at the state of our budget today and the debts that have been incurred. . . . But, of course, a lot will depend on a calm and civilized completion of the election.”

Compounding the fears of an autumn reckoning has been an intensified slump in production. Industrial output was down 4% for May, after a few months of stability, and reversal of that trend would take months even if there is a huge surge in investment.

“I am deeply convinced that the negative phenomena, including a drastic decline in collection of taxes, are an illustration of the economy’s sharp reaction to the forthcoming elections--to be more precise, a reaction to the possible victory of Communists,” Economics Minister Yevgeny G. Yasin said after releasing the disappointing May performance figures last week.

Yasin made clear that a new Yeltsin government would carry out plans to get tough with tax cheats once the sensitive campaign season is over.

The government has been forced to borrow at prohibitive interest rates and use Central Bank profits to cover expenses because tax revenues have been only 60% of the amount anticipated in the 1996 federal budget. Privatization revenues have also fallen drastically during the campaign, as the Kremlin was compelled to virtually halt the sale of state assets amid Communist allegations that Russians’ collective wealth was being plundered by the corrupt and the privileged. Foreign investment fell by 28.5% for the first three months of this year, exacerbating the financial crisis.

Deputy Economics Minister Sergei M. Ignatiev identified vodka sales, the voluminous “shuttle trade” of consumer goods by globe-trotting private businessmen and cars imported from abroad as the likeliest targets of higher or more effectively imposed taxes. A hefty tax on vodka could bring in 2 trillion rubles, or about $400 million a month, he estimated.

Domestic alcohol production is currently untaxed, to protect the massive industry from unfair competition by a federal sports committee granted exclusive rights to import foreign liquor duty-free. The terms of that privilege, accorded a major Yeltsin backer, are expected to be modified after the election.

Investment consultants insist their clients are poised to pour hundreds of millions into Russian industry as soon as the political uncertainties are overcome.

“It is already happening. A lot of speculative capital is coming from abroad and from Russian bankers, linked with the increasing confidence of a Yeltsin victory,” said Alexander Babayan, director of strategic investment for the Moscow office of CentreInvest Group.

Exuding the not-to-worry psychology of those nudging along development of a market economy here, he insisted that “the financial community has always been a good barometer of anticipatory politics.” Share prices have been rising, he said, because buyers are confident Yeltsin will win.