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Russia: Postponed Reforms, Poky Tax Receipts

Business Outlook: RUSSIA


Put on your rose-colored glasses. It's budget time in Russia. Parliament will soon begin debate on a 1998 budget that unrealistically expects $62 billion in revenues. The plan is almost sure to pass, even though similarly fantastic forecasts have forced huge spending cuts in the past two years (chart). Moreover, borrowing-cost targets will have to be revised up, since the Central Bank of Russia hiked interest rates sharply on Nov. 10 in order to defend the ruble.

The Kremlin had promised to institute reform. But President Boris N. Yeltsin's economic team jettisoned a more austere budget and delayed proposing a new tax code after the Communist Party, which controls Parliament's lower house, threatened a vote of no-confidence.

So far this year, revenues are running at just 52% of budget targets. Corporations alone owe a total of $15.2 billion in taxes, but collecting them is difficult. Regional leaders have pressured Moscow to ease up on local employers. And many companies won't pay until the government settles its own bills. The Kremlin owes $13.5 billion to contractors. Government utility and shipping monopolies are also squeezing businesses by charging high tariffs. Reformers have pledged to slash tariffs and swap taxes for debt with contractors, but progress is slow.

At least a better economy is helping revenues. The economy will rise by at least 1% this year, the first upturn since 1990. And it will likely grow 3% to 5% in 1998. Inflation is down to 12%--a welcome improvement--but one that worsens fiscal problems. Meeting fixed budget targets wasn't hard in 1995, when inflation was 132%.

For the past year, Russia's stock market has been a top performer. The government has capitalized on the rally by issuing $4.6 billion in Eurobonds and raising more than $2 billion this year by taking former state enterprises public. But most privatization gems are gone, leaving Moscow with one less source to tap for the revenues it desperately needs.By Carol Matlack in MoscowReturn to top

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