NIS REFORM DEVELOPMENTS

Created: 12/9/1992

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Office of Slavic and Eurasian Analysts

No. 22

Reform Developments

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Economic reform in Russiaerious setback, at least In the shonrun, as the Congress of People's Deputies voted against confirming Gaydar as Prime Minister, sent the governments economic program back for reworking and/ailed to renew Yel'lsin's special economic powers. The government has pledged to soldier on. but reform and the economy are now hostage to the resolution of Yeltsin's confrontation with the Congress. | |

RUSSIAN DEVELOPMENTS

changes to government economic policy and iu failure to renew

Yel'tsin's decree-making powersallanuary referendum to determine

whether the President or the Congress will lead the countxy-especially with regard to the economy. The unfolding constitutional for the time being. Meanwhile, the government will try to respond to the

economic resolution that gives it one month toevised economic plan fc Supreme Soviet approval and that calls for the incorporation of potentially damaging

measures (see box).

The Congress' economic resolution calls for;

o Resolution of social problems and the development of legislation toinimum standard of living as key preconditions for reform.

o Subordination of financial and credit policy to the development of -priority sectors and tempering the

production

of enterprise vverking capital,

o State regulation of investment, prices, credit, and monopolies.

o Rebuilding of CIS economic ties.

o Prevention of the breakup of 'unified technological complexes' by privatization.

o Creation by3 of a

foreign trade strategy thatxchange rate, secures critical

imports, and establishes

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acceptance, use, and repayment of :

foreign credits'.

o Indexation of agricultural product prices apparently to compensate for the rise in input prices.

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and preliminary figures suggest that this was also the case in November. In some sectors, such as ferrous and rwnferrous metals, machine building, and light industry, daily output in October and November reportedly exceeded average levels recorded in the third quarter. Inflation, meanwhile, accelerated as urban consumer prices rose by an estimatedercent in October and probablyimilar amount in November, driven primarily by food price increases. In his speech to the Congress, Gaydar indicated that the government began tightening its budgetary policy in September to slow inflation. I

Industrial Output

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Economic Decline Pauses but Inflation Accelerates. According to Russian government statistics, the rate of decline in industrial production stabilized in October,

Privatization and Demonopollzation

Market Price of Vouchersto Izvtsrtya, the pricesold on the RussianRaw Materials Exchange rosethe last week offrom an average0 (their face valueump in market price followedby the Statethat several largewill be held inPetersburg, Vladimirumberindustrial enterprises, touristbcryozka shops are scheduled toThe well-known and reportedlyBolshevik Cake Factory willfirst firm put up for sale ina move to help voucher holdersto invest their privatizationgovernment also announced it isan information center, calledAgency forand Development, thatdata bases on theand incomes of all

New Decrees Support Private Enterprises. Last week President Yel'tsin signed two decrees designed to strengthen the financial position of private enterprises. One decree, long advocated by Property Committee Chief Chubays. prohibits discrimination against privately owned enterprises in the granting of government credits, while the other provides special tax breaks, insurance against loss, and guarantees for foreign investors. To help promote private businessonference of leaders of joint-stock companies announced the formationew Association of Private and Privatized Russian Enterprises.

Money Talks at City Kiosks. Big city consumers are witnessing the mushrooming of kiosks where money buys almost any consumer good but often at high prices. These movable shops-the latest have plexiglass fronts and accommodate as many asustomersthe main streets of Moscow, St. Petersburg, and other cities. The kioskside variety of goods, including candy, clothes, liquor, shoes, and videos, and many accept rubles as well as hardew kiosks even sell privatization vouchers, according to Property Committee Chief Chubays. Once criticized for offering only foreign goods, many kiosks now sell Russian products. For example, the availability of food blenders surprised some customers who did not even know that Russia produced them. In what isrend, one Moscow meatpacking plant has cut off deliveries to its traditional customers-state-owned stores--and now earns more by sending its products directlyiosk. Competition from the kiosks is encouraging many state stores to spruce up thei**acilities and to rent out space to private businessesay of adding stock and drawing customers. [

Private Farms Increase. Russian farmers continue to establish peasant farms-family operated farms of lessapid rate. Asctober, thereeasant farms, compared with the2 goal. Meanwhile, Yd'tsin's decree ofear ago ordering state and collective farms io choose among several organizational options by the end of this year seems to have bogged down, with fewer than half of the farms registering as ordered. Moreover, nearly half of those that have registered have opted to keep their former state or collective designation. Most of the rest are choosing to be reorganized into joint stock companies. The decree also called for shutting down unprofitable state

and collective farms, but there have been no reports of this yet. |

Vouchers to bo Issued for Land. Russian privatization czar Chubays announcedecember that the Russian government will soonlan to issue all citizens vouchers for the purchase of small plots of land. This follows the constitutional amendment on land approved Saturday by the Congress of People's Deputies that permits the sale of small plots as longuyer agrees to use the land for gardening or house building. Neither the amendment nor (he voucher program applies to peasant farms, which are the fastest-growing area of private agricultural activity. The land vouchers would differ from the privatization vouchers now being distributed in that they could be used only for Land and could not be traded freely. Chubays said the government will submit the specifics to the Supreme Soviet early next year. | |

Moonlightingrowing number of Russian workers are taking second jobs to supplement falling realurvey conductedocal business journal found that about one-third of the state labor force incitynhabitants located in East Siberia--is moonlighting in the private sector. The respondents said they preferred ro cam extra money by working iniddlemanreating intellectual, metal, and. Irkutsk has been cited in the Russian business presseader in privatization, and. according to recent Embassy reporting,oercent of its retail trade and consumer service establishments are in the process of being privatized. | ]

Foreign Economic Relations

Domestic Bankers Seek to Restrict Foreign Banks. Russia's domestic banking industry is putting pressure on the government to restrict foreign bank activity in response to efforts by several foreign banks to open full-service branches in Moscow and St. Petersburg. Lastraft resolution was considered by Parliament that would require the Central Bank to stop issuing operating licenses to foreign banks4 and to suspend licenses already granted until that date. Supporters of the resolution attempt to justify itay of stemming capital flight, but their real intent is to limit foreign competition. However, because of opposition to the measure from someinal vote on it was postponed indefinitely. In order to get around this postponement, the Central Bank is planning to implement new regulations on foreign banks lhat would prohibit them from taking deposits from non-bank Russian sources. Loan activities would remain unconstrained, however.

Russia Limits Oil Exports to Former Soviet Republics. Government officials have announced that Russia will exportillion tons of oil next year to former Soviet republics, downillion tons this yearillion tonsussia will guarantee delivery of half ofillion tons in return for imports critically needed by Russian enterprises. The terms of these state-to-state barter deals have not been determined, but the effective price of oil will probably be close to world levels. Moscow's new industrial supply organization, Rosskontrakt, has been tasked to ensure thai quarterly exports of oil under stale guarantees are balanced by the agreed-upon flows of imports. To obtain the other half of theillion tons of oil, former republics will have to negotiate

directly with Russian oil enterprises, which will probably demand world market prices and. in some cases, payment in hard currency. Russia will not guarantee gas deliveries, but expects gas deliveries to remain at current levels.

Ruble Rises In Strength, Then Falls. Last week the ruble posted its first significant gains since early October, rallyingubles per dollar at the start of Tuesday's auction on the Moscow Interbank Currency Exchangeubles at the closing bell on Thursday (seeentral Bank officials attributed the rise to enterprises' need for rubles to settle end-of-year accounts, reduction of the inflow of rubles calming of investor fears over the current from other republics, and a

temporary legislative Congress. The bank used the opportunity to build up its hard currency reserves by buying moreillion, iu first large-scale purchases of hard currency on the exchange. Central Bank intervention may also have been intended to smooth the ruble's rise. Market analysu estimate that the ruble could have strengthened to as muchubles per dollar had the bank not purchased dollars. It is unlikely, however, that this most recent rallyarket bottom, mflation-the driving force behind the ruble's long slide-remains stubbornly high. On Tuesdayecember) the ruble resumed its fall, weakeningubles per dollar.

DEVEU)PMENTS IN OTHER NIS STATES

Ukraine Unveils Privatizationannounced plans to openaccounts for all Ukrainian citizensbe used only for purchasing sharesshops and firms. Theamounto four months' wages-andbe transferable. The planpublic auctions topercent of small state businessesmonths. Prime Minister Kuchmaa vocal supporter of smalland this plan probablybacking from him.in the cabinet andlegal andhowever, will likelyon implementation.

Estonian Banks DeclareBank of Estonia incontrol over two of thecommercial banks,Bank and Union Balticplaced restrictions on withdrawalsthird bank. The affected bankshalf the bank accounts into Prime Ministerreemptive effort toimminent bankruptcies. Bankthat the Union Baltic Bank maybut anticipate that theBank will eventually beThese commercial banks, likethe former USSR, areand have largenonperforming loans. The bankshurt by the freeze on hardheld in Vneshekonombank

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SPEC1AL ANALYSIS

New Russian Investment Policy: Deja Vu?

After sharply cutting state-funded invesanent this year, the Russian government plans to increase it by nearly half in real termshe decision reflects the government's effort to meet the needs of invesanent-starved sectors such as energy, food processing, and transportation, to support defense conversion, and to quiet major industrial lobbyists such as Ovtc Union. The government also plans to take measures designed to stimulate alternative sources of investment funding, such as tax breaks and bank credits for enterprises that invest, tf targeted effectively, increased investment from the budget could help slow the decline in output. But the dangers are that political rather than economic considerations will determine the allocation of investment, enterprises will continue to rely on state support, and the policy could be highly inflationary,

Unfulfilled Expectations

In an effort to reduce Russia's budget deficit, the government slashed budget-funded investment this year by at least SO percent in real terms from last year's level. Major sectors including construction, energy, and agroindustry were the most affected. The cuts were particularly sharp in September as the government sought to slow inflation. The government had hoped that other sources of investment-mainly enterprise funds-would help offset the cut in state funding. But by mid-summer. Acting Premier Gaydar, who had harshly condemned the old system of centrally directed investment as economics editor of Kommunist. was forced to acknowledge that alternative investment sources had failed to live up to

expectations. Many enterprisesstrapped and had little moneyon capital improvements oralso noted that private savingsinvestment institutionsand foreign investmentof the country's politicaluncertainties.

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The government has increasingly come under fire from industrial interest groups such as Civic Union because of the low level of investment. Civic Union stated in October that it is "altogether impermissible" to sacrifice investment to "the dogmaeficit-free budget" and called for an expansion of government investment and credits to maintain production and prevent large-scale unemployment.

Seeking To Boost Investment

In response to growing concerns over the industrial decline and the crumbling infrastructure, and mounting criticism from industrial interests, the government's3 budget calls for investment spending to increase by about half in realincrease ofercentage points of budget expenditures.ecent speech to the Supreme Soviet, Gaydar indicated that high priority will be given to transportation, fuels and energy, specific projects in metallurgy, chemicals, and

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