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How Much Would A Yeltsin Win Cost? (Int'l Edition)

International -- Finance: BUDGET CRISES


He's spending big to win votes. Probably too big

Coal miners in the Arctic city of Vorkuta are mad at Russian President Boris Yeltsin. Their early support was crucial to his presidential victory in 1991. But the miners, who haven't received any wages from the cash-strapped government since February, now feel betrayed, and many plan to vote Communist in the coming election. So in a recent campaign swing through Vorkuta, Yeltsin tried to buy back their support. Meeting with miners at the bottom of a shaft on May 25, he promised to send $26 million worth of back pay to the Vorkuta region.

Vorkuta is just a small part of Yeltsin's rubles-for-votes campaign. Facing a tough battle for reelection against Communist Gennady Zyuganov, the incumbent is on a spending binge. Since February, the government has handed over at least $1.6 billion to cover workers' back wages, and now Yeltsin has promised to fork over millions more to voters for everything from housing to summer camps. Trouble is, the government can't afford it. Although it has wrestled down inflation, Russia's $8.2 billion budget deficit in the first quarter was 35% higher than planned. Now, Yeltsin's lavish spending, combined with poor tax collection and rising borrowing costs, could spark a post-election crisis and destroy Russia's hard-won economic stability.

As the government relies increasingly on sales of high-interest Treasury bills to meet its obligations, even Yeltsin's own ministers are getting nervous. "Attempts to raise revenue to cover the budget deficit in the runup to the elections could cause large crises on the government bond, credit, and currency markets," said Economics Minister Yevgeny G. Yasin in a letter to Prime Minister Viktor S. Chernomyrdin that was leaked to Kommersant Daily, a prominent business newspaper. Yasin could not be reached for comment.

Unless it slashes spending after the election, the government simply doesn't have enough money coming in to support Yeltsin's promises. Tax evasion is a chronic problem for Russia's authorities, but political uncertainty has exacerbated it this year. Entrepreneurs and executives are waiting to see who wins before paying up. As a result, tax arrears have jumped by almost 40% in real terms since the beginning of the year. Revenues in the first quarter were only 60% to 65% of budgeted levels.

YAWNING DEFICIT. Election uncertainty is also driving state borrowing costs skyward. One of the Yeltsin government's great successes has been creating a functioning Treasury bond market. T-bills have allowed the government to finance itself without printing money--a key factor in bringing monthly inflation down from more than 17% in January, 1995, to 2.2% this April. But with little tax revenue coming in and Yeltsin giving away the store, the government is dangerously reliant on new T-bill sales to finance its yawning deficit.

And that reliance is getting costlier. Russian banks, by far the biggest buyers of T-bills, are pushing up yields by limiting their buying. When the Finance Ministry auctioned two issues of six-month T-bills on May 22, average yields reached 148% and 175%, the highest in the market's history. Yields were expected to exceed 200% in a late May auction. The government is desperate to drive rates down because it must refinance an additional 60% of its outstanding T-bills in July and August.

Moscow has one card up its sleeve: foreign investment. Officials are reluctant to allow foreign participation in the T-bill market before the election, fearful that voters might accuse them of surrendering Russian independence. But if Yeltsin wins, the Finance Ministry will probably let foreigners into the short-term bond market fast, so the fresh demand can put a damper on yields. "The government is betting that Yeltsin will win and that Russian and foreign capital will come in time for heavy redemptions in July and August," says Tom Reed, director of fixed income at Alliance-Menatep Group in Moscow.

That may not be a forlorn hope. Foreign investors' faith in a Yeltsin victory has sparked a two-month-long bull run in the Russian stock market. The Moscow Times index of blue-chip stocks rose 29.7% between May 20 and May 27. Since Yeltsin began gaining in the polls in mid-March, the index has jumped more than 100%.

STRAPPED. But on the way to victory, Yeltsin could do more fiscal damage. Enlisting the central bank for his campaign, he has already "recommended" that it transfer almost $1 billion to the Finance Ministry to pay government debts. And the Communist-dominated parliament is set to debate funding bills that would increase social spending by $20 billion, out of a total budget of $92 billion.

Meanwhile, Yasin warned Chernomyrdin in his letter that Russia's hard-currency reserves could sink to $3 billion or $4 billion, from $16 billion now, before the June 16 election if the government continues its spending spree. That's because the central bank would have to prop up the T-bill market if banks can't or won't buy enough of the paper. And if reserves start running low, the central bank may have to print money to pay for T-bills, which could reignite inflation.

Strapped as the Yeltsin government is, a Zyuganov victory could be even grimmer. The Communist Party's strategy, unveiled on May 27, is to spend its way out of economic stagnation. Zyuganov would boost subsidies to industry and agriculture, shun International Monetary Fund loans, and kill the T-bill market. Foreign investors would pull their money out of stocks, and domestic players would continue to ship their capital abroad. No matter who wins the election, the quick cash fix for the coal miners in Vorkuta doesn't look as if it's going to turn into a dependable income stream any time soon.By Patricia Kranz in MoscowReturn to top

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