On March 17 a reinvigorated Boris Yeltsin announced a complete overhaul of the Russian government. Leading figures among the newly appointed reformers include:

• Anatoli Chubais, who has moved back into the government (after serving as presidential chief of staff) as first deputy prime minister and economic policy overlord, replacing former Oneksimbank chief Vladimir Potanin. Chubais has also become finance minister, taking over from Aleksandr Livshits, who returns to the presidential administration as deputy chief of staff. Chubais’s major assignment is to reform Russia’s grossly inefficient tax collection system, raise revenues for empty budget coffers, and initiate banking reforms. (Aleksandr Morozov, an economist with the World Bank, explained that the first step could be the establishment of a nationwide federal treasury system to coordinate banking operations using state budget funds. This would lead to a gradual cut in the number of currently authorized commercial banks. They may be replaced with a network of regional treasury branches working directly with Russia’s central bank.)

• Boris Nemtsov, the liberal reformist governor of Nizhni Novgorod, who has come in as another first deputy prime minister. Nemtsov’s job will include restructuring state monopolies, such as the electricity, railroad, and gas sectors. Another of his main goals will be the creation of a social safety net that will allow companies to restructure and form new relationships with regional governments.

• Yakov Urinson, who has taken over as economy minister from Yevgenii Yasin (he was Yasin’s first deputy) and has also become a deputy prime minister. The economy ministry has absorbed the industry and defense industry ministries. The construction ministry has been abolished. Yasin, in turn, has become a minister without portfolio engaged in policy analysis.

• Alfred Kokh, who continues to head the State Property Committee (GKI) and has become deputy prime minister.

• Oleg Sysuev, mayor of Samara, who has also become deputy prime minister with responsibility for housing and utilities reform.

On the Downside

The new team takes over an economy that is drifting, in which many reform issues are unresolved (including regulation of state monopolies and of bankruptcy procedures, codification of land privatization and legislation of security markets) and social tension is high.

The bottom-line problem remains the government’s failure to meet budget obligations and collect planned taxes. Moscow’s failure to pay millions of government workers and pensioners and to pay its bills to private contractors has deepened the anger of the Russian populace. Wage and salary arrears at the end of March 1997 amounted to more than 50 trillion rubles ($8.8 billion) in back wages, of which the state owes 10 trillion or around 6 percent of the officially recorded annual wage and salary bill. Budget revenue was only 55 percent, and spending 50 percent, of planned levels in January-February 1997.

By the end of 1996 interfirm debts topped 490 trillion rubles, or 25 percent of GDP (against 15 percent in 1995), and federal tax arrears another 61 trillion. Barter has become common, accounting for perhaps 80 percent of payments to energy producers. Most firms have learned not to ship goods unless their clients pay cash up front. The IMF has refused to release the February 1997 tranche of its $10 billion extended fund facility loan because of doubts about the credibility of the 1997 budget. The budget crisis delays the decline in interest rates that is vital to private investment.

Russian GDP has been falling for the past seven years; in 1996 the decline was 6 percent, steeper than the 4 percent fall in 1995. The World Bank predicts that the fall will cease this year, but does not expect much positive growth until 1998. The State Statistical Committee (Goskomstat) reported on March 17, that year-on-year, Russia’s GDP increased by 0.1 percent in January and 0.9 percent in February. But this encouraging upturn was "produced" by the statisticians of Goskomstat, according to "Russian Economic Trend," a monthly report of the EU-funded, Moscow-based Institute for Macroeconomic Research. Goskomstat boosted its 1997 estimate of the size of the black economy to 25 percent compared with last year’s 20 percent, but did not adjust the 1996 figures upward. Without this "data massage," the reported GDP would have fallen by 6 percent in January. The new methodology would have produced 5 percent growth for February. That was too much even for the statistical office, so they adjusted the figure downward.

Other new figures should be evaluated in the light of these manipulations. In January-February the coal and electrical energy output declined by 4 percent each. The population’s real disposable income increased by 5 percent, and the average monthly wage went up to 885,000 rubles ($155). The number of people living below the minimum subsistence level (404,000 rubles at the end of February) fell from 31.9 million in January to 31.5 million in February.

Social Tensions

A new industrial and financial elite has grown and gained importance (see the following article). Heads of leading Soviet-era monopolies, as well as representatives of an aggressive banking and financial community, have accumulated enormous power and wealth, taking advantage of political connections, weak rules, and lack of legislation. Many Russians say the concentration of wealth and influence in the hands of a few, well-connected industrialists and bankers has discredited reform. Nemtsov and Chubais have been charged with reviving reforms and making sure that wealth starts circulating among ordinary Russian citizens. (Boris Nemtsov declared shortly after his appointment that Russia must now choose between "bandit-capitalism and capitalism with a human face." He declared himself in support of the latter.)

On paper Russia has 15,000 joint stock companies with 40 million shareholders, the world’s largest on both counts. But insider owners continue to dominate, and the expected shakeout of loss-making plants has failed to materialize. Seven leading firms that paid less than 20 percent of their taxes were warned and issued bankruptcy papers late last year. The Togliatti auto giant AvtoVAZ was forced to agree to sell 51 percent of its shares because of tax debts. But the Tatarstan truck giant KamAZ, which was initially on the bankruptcy list, suddenly was taken off.

FDI Down

Foreign direct investment in 1996 reached an estimated $800 million, down from $1.5 billion in 1995. Corruption, taxation, red tape, and legal uncertainty are still major barriers. Only a handful of new manufacturing projects started in 1996, such as a $140 million Snickers chocolate bar plant. An auto assembly plant was inaugurated by GM in Tatarstan, and South Korean automaker KIA Motors, plans another in Kaliningrad. Still, the energy sector urgently needs an injection of foreign capital and technology: oil production has fallen by 40 percent since 1987 and contracted another 2 percent in 1996. However, the Duma refused to sign off on the list of approved oil and gas sites and without this the 1995 Law on Production Sharing cannot go into effect. The government has made no progress with the privatization of the telecom company Svyazinvest, which was canceled at the last minute in December 1995.

On the Brighter Side: Export Booms . . .

Reasons for optimism can be found in Russia’s rise in exports and increasing fiscal stability. Exports in 1996 rose 8.3 percent to $86.5 billion and imports were little changed at $46.6 billion, giving Russia a trade surplus of $40 billion. From this should be subtracted the estimated $8 billion of goods brought in by individual "shuttle" traders. Oil and gas accounted for 45 percent of the exports. Russia’s arms exporters probably earned $3 billion, with fighter sales to China and India. Imports were mainly machinery, meat, sugar, and alcohol. Last year saw a modest revival of trade with the Commonwealth of Independent States (CIS). CIS countries took 20 percent of exports and provided 30 percent of imports—a rise of 12.5 percent and 8.3 percent, respectively. As part of the IMF agreement, export duties were lifted from all goods except oil in April, and from oil in July, although the revenue loss was compensated by an increase in oil excise duties (paid by domestic consumers). Import tariffs were rearranged in May, although the tariff average stayed at 14 to 15 percent.

In 1996 the ruble held its value against the dollar in real terms, ending the year at 5,550 rubles to the dollar. The 20 percent nominal depreciation was roughly equal to the domestic inflation rate. The central bank kept the ruble within the "corridor" introduced in July 1995, and in July 1996 switched to an inclined corridor (akin to a crawling peg), with parameters announced six months in advance. In May 1996 Russia announced its intention to conform to Article 8 of the IMF Charter, meaning current account convertibility for the ruble. Official reserves declined slightly to around $16 billion by November, while capital outflow amounted to about $12 billion over the year. Russian individuals and firms now hold a total of $40 billion to $50 billion abroad. In addition to the $10.1 billion IMF loan, the World Bank approved eight loans in 1996, totaling $1.8 billion, for enterprise restructuring and social infrastructure. Late last year Russian state bonds were ranked as investment-grade by international rating agencies. Gazprom shares are quoted on the London Stock Exchange, and Vimpel-Communications, a mobile phone company, became the first Russian company listed on the New York Stock Exchange.