CIS

Moldova

Central bank’s hard currency reserve halved in 1998. The Moldovan National Bank’s hard currency reserve shrank to half its previous level during 1998 and is currently $150 million. The central bank ran short of its own net hard currency assets to satisfy state needs, so it had to resort to the IMF. "The reserve shall be replenished immediately upon the arrival of $35 million from the International Monetary Fund and then $35 million from the World Bank," National Bank President Leonid Talmaci said. Since August 17 (the date Russia freed the ruble rate), the bank has spent some $100 million over two months to redeem treasury bonds and underpin the Moldovan lei on the currency market. In early November the bank announced it was ceasing its currency interventions to preserve the country’s hard currency reserve. The inflation rate in 1999 is expected to hover around 15 percent. The expected budget deficit in the first half of 1999 should be financed from privatization revenue, according to Talmaci.

Russia

Industrial output dropped 5.5 percent while inflation surged to 84.4 percent, in 1998. Russia’s Economics Ministry has reported that the ruble has plummeted by nearly 70 percent since September. Russia has the worst-performing stock market among 32 transition countries monitored daily by the International Finance Corporation. As a result of Russia’s crisis and lower world prices for oil (Russia’s main source of export income), the country’s foreign trade for the period from January to November was down 13.6 percent as compared with the same period in 1998. The Economics Ministry said final reports were likely to put exports for 1998 to countries outside the territory of the former Soviet Union at $57.7 billion, or 17.6 percent less than in 1997. Imports for 1998 are 25 percent down from 1997.

Foreign investment down. Foreign investment in Russia totaled just $1.6 billion in the third quarter of 1998, down from $3.7 billion in the second quarter and $4.0 billion in the first quarter. Investment fell in almost all sectors of the economy. Foreigners took a total of $1.3 billion out of the country in the third quarter, so net foreign investment amounted to less than $300 million. Net foreign investment in the first nine months totaled $3.4 billion. There was a net outflow of foreign capital in the financial services industry ($200 million) and in advertising and auditing ($270 million) in the first nine months.

EU plans new $5 billion aid program. The European Union is putting up $5 billion for a new aid strategy for Russia, aimed principally at subsidizing and encouraging foreign private investment. Tough conditions will require the fulfillment of precise interim performance targets before new money is released. The existing Tacis program, which has spent over $3.3 billion since 1991 as the EU’s main aid and technical assistance vehicle, is to be overhauled and renamed. This follows a highly critical internal review that concluded that: "coherent strategies for promoting the two Tacis objectives of market-orientated reforms and the reinforcement of democracy are largely absent." The new scheme proposes to put 25 percent of EU funds into promoting private investment and another 25 percent into incentive schemes to reward the best development projects in each of the former Soviet states. The current approach, under which Tacis has supported 1,011 separate programs, is to be replaced by a priority system of putting more resources into fewer than 100 better controlled projects. The EU will keep working on aid projects to improve the safety of Russian nuclear power plants and to inculcate banking, accounting, and financial skills.

Population down further. Between January and October 1998, Russia’s population fell by 311,000, or 0.2 percent, to 146.4 million, figures from the State Statistics Committee revealed. Natural population decline remained the chief reason for the dropping numbers. In 1998 Russia saw 439,400 new migrants, while174,500 left the country. (The figures for 1997 were 490,200 and 196,600, respectively.) The mortality rate, which rose to 15 per 1,000 in 1995 from 7.4 per 1,000 in 1960, put Russia behind all the countries in Europe, America, and Asia, apart from war-torn Afghanistan and Cambodia, according to a report by the presidential Commission on Women, the Family and Demography. The rise in the mortality rate has been attributed largely to the effects of rampant alcoholism and declining standards of health care.

Organized crime controls nearly 50 percent of the Russian economy, Prosecutor General Yury Skuratov, who was cited according to Interfax. Skuratov said organized crime is blocking the normal operation of banking institutions, making the shadow businessmen rich and creating a federal budget deficit. Prosecutors estimate 50 percent of all commercial banks and 40 percent of state-owned companies are criminally controlled, thus affecting between 40 and 50 percent of Russia’s annual gross domestic product. Russia’s natural gas, oil, and coal sectors have been particularly hard-hit by organized crime units.

Salvaging the banking system. Central Bank of Russia First Deputy Chairman Andrei Kozlov estimates that of the country’s roughly 1,500 banks, at least 720 will have to close their doors. Kozlov said rescuing the banking sector will cost 141 billion rubles ($8.3 billion). To date, the central bank has granted stabilization credits of nearly 15 billion rubles ($860 million) and planned to use another 5 billion rubles in 1998. In 1999 the bank plans to provide another 25 billion rubles’ worth of stabilization credits.

Ukraine

State debt is accumulating. Finance Minister Ihor Mityukov reported that state debt totaled $14.9 billion as of October 1, of which external debt had risen $1.4 billion from the start of the year to $10.9 billion. "We have now reached a critical point," he said. The government plans to raise 23.1 billion hryvni ($6.74 billion) in budget revenues in 1999. The national bank’s goal in 1999 is to preserve the hryvnya exchange rate at 4 hryvni to $1, bank chairman Viktor Yushchenko said. Economy Minister Vasyl Rohovyy told the parliament that GDP is expected to fall by 1.5 percent in 1998, instead of growing by 0.5 percent, as previously projected. The economy is projected to grow by 1 percent in 1999.

Central and Eastern Europe

Estonia

Spending cuts. The cabinet approved cutting the 1999 budget by 800 million kroons ($62 million), based on projected GDP growth of 4 percent. As a result, local municipalities will receive considerably less money, as will those ministries whose budgets were expected to show the biggest growth in 1999, including the Ministry of Interior. The opposition had rejected the original 18.45 billion kroon budget, which was based on GDP growth of 6 percent, as overly optimistic.

Poland

Administrative restructuring. Poland redrew its domestic administrative map under a plan that aims to increase government efficiency. The makeover, which went into effect January 1, 1999, replaces the country’s communist-era division into 49 regions with 16 larger ones, which designers say are more in line with existing administrative regions in EU countries. The new scheme also brings back 308 county-level units that existed in Poland decades ago. Local units, such as towns and villages, remain largely as they were. The 16 regional governors are appointed by the government, while politicians at lower levels were elected in nationwide local voting last October. Economists say that to make the administrative reforms truly effective, more taxing power will need to be shifted to local governments.

Inflation down to one digit. The annual inflation rate from October 1997 to October 1998 dropped to one digit (9.9 percent) for the first time since Poland began reforming its economy. Consumer prices rose by 7.6 percent from January to October 1998, down from 10.8 percent in the same period in 1997. Lower inflation can be attributed to smaller price increases for foodstuffs following the good harvest and surplus agricultural production of 1998.

Romania

Poor performance in 1998. Alone among the transition economies in Central and Eastern Europe, Romania’s economy has by most measures performed worse since a reformist government was elected to replace the former Communists (in Romania’s case, in November 1996), according to research scholar Michael Wyzan. Although inflation is down and the exchange rate has been relatively stable in 1998, GDP will decline between 3 and 6 percent for the second consecutive year, and privatization efforts have been largely stalled. After experiencing positive growth from 1993 to 1996, GDP fell by 6.6 percent in 1997. Industrial production was down by 19.1 percent in the first half of 1998, relative to the same period in 1997. Slower growth in imports has been more than offset by a decline in exports.