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Snippet on Russia Two articles, from www.russiatoday.com and the New York Times, 05 September 1998, followed by my comments: Details of "Chernomyrdin-Fydorov" Plan Emerge Russia Today columnist says PM designate has Western advisors working on sweeping social and economic changes. By Rod Pounsett, for Russia Today (Staff Report) Details are emerging on what is now known as the Chernomyrdin-Fydorov Rescue Plan. The plan, the acting prime minister's office tells me, is aimed to urgently stimulate the economy, stabilize the ruble and restore public and business confidence. The five-year plan calls for more borrowing and pegging the ruble to Western currencies through the use of a currency board. And it has been conceived with major input from Western advisers, including a former head of the German Bundesbank, a former finance minister from Argentina and Harvard professor Robert Barrow. The key elements are the temporary unrestricted flotation of the ruble ahead of the establishment of currency board. There will be major restructuring and possible increases of foreign loans. The Tax Service will write off Russian businesses tax debts and there will be a lowering of their tax rates and social contributions. Government-controlled wages and pensions will be pegged for two years. Drastic cuts will be made to welfare benefits. All restrictions on the use of foreign currency on Russian territory are to be lifted. There will be a halt on regions independently borrowing money. The plan also includes assistance for Russian banks; the mandatory deposits they have been forced to make with the Central Bank will be returned to give them 35 billion rubles to help them through the crisis. Although this may not be anywhere near enough to avoid bankruptcy for many of them. The government may also introduce a 'Hard Ruble' - a currency unit pegged to the dollar for non paper money transactions. This was an instrument last used by Lenin between 1924 and 1930 when he attempted to stabilize the economy and experimentally reintroduce private trade. There may also be measures to reduce taxes on energy exports and possibly other potential foreign currency earning commodities- That is if they can stave off international anti-dumping opposition . A primary factor for international digestion will be the proposal to ask for a $10-$15 billion loan from the G7 nations over 15 years with repayments deferred for five years. It is suggested this money would be deposited in a foreign central bank (possibly the Bundesbank) and conditional upon Russia sticking to a currency board control of the ruble rate for at least five years. Added to the $12 billion foreign currency reserves currently claimed to be held by the Russian Central Bank, it is thought this would give Russia enough resources to draw a line under its debt-ridden economy and make a new start. But this time with its belt severely tightened. Lifting all restrictions on the use of foreign currency on the internal market has a double objective. First it is aimed to counter the effects of the rapidly devaluing ruble. Wholesalers have already started to withhold stocks from the marketplace while the ruble is on the slide. It is also hoped this measure will suck out larger amounts of the estimated $50 billion under-the-mattress cash stockpiled by the untrusting Russian public. The tax reforms includes a 15 percent reduction in business profits tax, down to 20 percent. There will also be five year tax holidays on capital investment projects. Firms will also see a 50 percent reduction of the contributions to the social fund, for such things as pensions and medical care of employees. The plan promises to write-off tax debts accrued by enterprises up to July 1 this year provided firms pay up new taxes on time. If they fall into arrears for more than six months their business will be taken away and resold by the government. There will be a standard tax rate of between 15 and 20 percent for all individuals, regardless of income. Only the needy will get reductions. The same criteria of putting the needy first will apply to social benefits - taking vast numbers out of the current welfare net. For instance, the better off will lose child benefits. Wages and pensions are to be pegged for two years from Jan. 1 1999. Acting Prime Minister Victor Chernomyrdin and his team, including his deputy and Tax Service chief Boris Fydorov, are convinced the first phase populist elements of this package will stabilize the internal market and restore public confidence in advance of stricter management of the economy and increased austerity next year. I suspect Western response to this latest quick fix concoction will be dismay. Especially if, as it suggests, much needed strong but unpleasant tasting medicine will not be consumed until after a another period of Russia living beyond its means. ( (c) 1998 Staff Report) ---------------------------- and from the NY Times... Battling to win approval as Prime Minister, Viktor S. Chernomyrdin outlined a plan to rescue Russia from its economic woes. FIRST STAGE Print money in “controlled emission.” Pay pensions and pay wages owed to civil servants, soldiers and defense workers. Prop up the banking system with injections of money. Allow ruble to float. Later, “rigidly link” to gold and hard currency reserves. SECOND STAGE Force companies to pay debts and taxes or push them into bankruptcy. Support domestic manufacturers and exporters. Simplify taxes for corporations and establish a flat 20 percent income tax. Establish a state monopoly on alcohol. ------------------------------ My Comments: Contrary to the reporter's implication in the last paragraph, I'm impressed by the decisiveness of the plan in Russiatoday, its comprehensive construction and the necessary priority of social conditions first and finance second. Many in the West may not like it but the alternatives are worse. To be sure the plan has no teeth if not followed. Some portion of Russia's nuclear arsenal could be put under international control as a "hostage" although the form would need to be carefully designed to avoid further wounding a damaged pride. Some demand that Russian-sourced capital now outside the country had to be returned for investment in parallel with international participation could be made. The business leaders would scream at this provision. And an international "governor general" rather like Cavallo from Argentina, already advising on the scene (although he is reported to be in the Ukraine this weekend), could monitor and report to monetary authorities in the world. And perhaps something symbolic with NATO could be used as a motivation to prevent a separation from the West. Would the plan work? I'm not sure but it is in the right direction and points out the severity of the problem. The world still would have the global condition of shrinking liquidity and solving Russia's problem, even if successful, would not correct the long wave phase we may be in. And, finally, I added the NYTimes outline of the Chernomyrdin plan given to the upper house on Friday which sounds quite different. Clearly there is lots of movement still underway. If something like the sweeping plan is not accepted, the quite reasonable and supportive statements of Gen Lebed indicate he is ready, if needed. Dean LeBaron |
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