How Much Would A Yeltsin Victory Cost?

He's spending big to win the election. 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 some $1.6 billion to cover workers' back wages, and now Yeltsin has promised millions more to voters, for everything from housing to summer camps (table). Trouble is, the government can't afford it. Although inflation has been wrestled down, Russia's $8.2 billion budget deficit in the first quarter was 35% higher than planned. Now, Yeltsin's lavish spending, 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 paper. 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 chronic in Russia, but political uncertainty has exacerbated it this year. People 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.

At the same time, state borrowing costs are going through the roof. One of the government's great successes has been creating a functioning Treasury bond market. T-bills have allowed the state 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.

VULNERABLE. But that reliance is getting more expensive. Russian banks, by far the biggest buyers of T-bills and themselves hungry for cash, 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. Says Dirk Damrau, managing director of Renaissance Capital Group in Moscow: "The banks know the government is vulnerable."

Ironically, foreign investors' faith in a Yeltsin victory has sparked a two-month-long bull run in the Russian stock market. Since Yeltsin started rising in the polls in mid-March, the Moscow Times index of blue-chip stocks has jumped more than 100%. But that does not help fill government coffers. And on the way to victory, Yeltsin could do more fiscal damage. He has already "recommended" that the central bank transfer almost $1 billion to the Finance Ministry to pay government debts.

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 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 doesn't look as if it's going to turn into a dependable income soon.

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