The fiscal problem
There is wide agreement that mismanagement of a major fiscal imbalance and of the
market for government debt was the proximate cause of the present Russian financial crisis. But
it is more accurate to say that the persistent Russian fiscal crisis is itself just the expression of the
overall crisis of the Russian transformation. Fundamental institutional reform of both taxation
and expenditure, an immense challenge in any event, has been repeatedly set back by political
conflicts and centrifugal forces. As alternative estimates of the budget deficit suggest (table 1),
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1 The substantial difference before 1998 between the Russian official figure and all the other estimates,
including those of the IMF, is due overwhelmingly to the insistence of the Ministry of Finance that interest payments
on (zero-coupon) GKOs (treasury bills) should not be counted as expenditure.
none of the fiscal campaigns to address the imbalance have ever succeeded in reducing deficits
to sustainable proportions. The principal change has been simply in the method of financing the
gap, the major shift from the inflation tax to bond and bill financing occurring in 1995.
In view
of the high real interest rates necessary to place domestic debt, a sustainable level of the fiscal
deficit in relation to GDP could have been attained only if there had been more successful efforts
to increase government revenue and economic growth than those actually made.
For the first half of 1998, the consolidated budget deficit (federal, regional and local, but
excluding “off-budget” funds) stood at 4.8 per cent of GDP, according to the lowest (Russian
State Statistical Committee, Goskomstat) figures.1
The overall position was considerably worse
than this, particularly because the major extra-budgetary fund, the Pension Fund, is reportedly
also running an exceptionally large deficit. These figures must also be seen in the context of
mounting payments and wage arrears throughout all sectors of the economy.
Recent acute fiscal distress occurred despite a remarkable primary federal budget surplus
for the first five months of 1998 so that the overall deficit was increasingly showing the impact
of the harsh arithmetic of a debt spiral: debt service was fully one-third of federal spending in the
first quarter of 1998. This visible strain was in itself another factor undermining confidence in the
ability of the government to correct the situation and thus led to increasing difficulty in placing
new debt. In July the government-owned Sberbank declined to roll over its holdings of maturing
short-term treasury bills (GKOs), a remarkable indicator of the fragility of the situation.
The growing burden of interest payments was built into the measures taken in 1995: while
Russian official figures continue to record the 1995 budget deficit at 3.0 per cent of GDP, interest
payments on the growing stock of GKOs were actually adding nearly the same amount to the
financing needs in that year. To avoid a debt spiral, any programme adopted then would have
had to assume all of the following: a return to economic growth in Russia - indeed, to rapid
growth of 4 per cent or more; a stable exchange rate; rising world commodity prices; a
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government able to manage progress towards a primary budget surplus by means of a major
fiscal reform; and the willingness of initial bond holders to roll over and increase their holdings.
Not surprisingly, these conditions turned out for the most part to be mutually inconsistent or
unattainable. A rise in world oil prices in 1995 and 1996 initially masked this impossibility.
The first issues of GKOs were available only to residents, and offered very high interest
rates. In 1996, and in part as a result of IMF insistence, the market was opened to non-residents.
This did eventually succeed in lowering the interest rates (although the fears that drove up rates
before the presidential election of July 1996 locked in subsequent high payments for the debt
incurred at that time), but it also clearly meant that the dangerous accumulation of debt could be
continued. Until the first major crisis of confidence in November 1997 this is what, in fact,
occurred.
