During Russia's years of reform, Moscow acquired an image as the country's most advanced and prosperous region. At the same time, many liberal economists criticised the Moscow administration in general and Mayor Yuri Luzhkov in particular for creating an over-regulated and inefficient system of city management. In the wake of the August 17 crisis, many analysts predicted that Moscow would be unable to avoid defaulting on its debts.

At the start of the year, it appeared that these gloomy forecasts were about to be realised. An early indication was the removal in February of Mechislav Klimovich from his position on the Moscow administration's Committee for Municipal Debt and Securities Market. His notice of dismissal was unusually harsh: "For failing to organise effective work of the Moscow Committee for Municipal Debt, causing the Moscow administration to experience serious problems with the financing of major investment programmes in late 1998."

In the wake of this sacking, a major outcry ensued concerning the failure of the Moscow administration to meet payment deadlines on its foreign debt. The strongest criticisms were levelled against the Otechestvo movement, which was seen as a socio-political movement set up by Luzhkov ostensibly as a campaign vehicle for the 2000 presidential election. But at the same time, the Moscow government insists that the city will meet all its foreign debt obligations. At a recent meeting of the international press club, Luzhkov reiterated this commitment and noted that Moscow had already begun to make payments not due until the year 2000.

In order to stay solvent, the Moscow administration must promote a favourable investment climate in the city. The newly appointed acting head of the Moscow Committee on Municipal Debt Sergei Pukhov said, "The Administration continues to stick to its former policy of borrowing. Funds will be attracted only on favourable conditions and all debts will be serviced strictly on time."

The truth about the state of Moscow's finances probably lies somewhere between these two opinions. While the city has not been unaffected by the crisis, the situation may not be as bad as Luzhkov's political opponents try to make out.

The only minor glitch of the Moscow administration was its missing a foreign debt servicing deadline in late February. Under the terms of an agreement with a large Western bank, the Moscow Committee on Municipal Debt was to have paid approximately $17 million by February 24, as payment of interest on a $295 million loan from late August 1998. But the sum was not actually transferred until February 25 and 26. According to the official version of events (confirmed by Standard & Poor's), the delay occurred because the Moscow administration had not received the necessary documents from the creditor bank on time. Representatives of the administration have repeatedly emphasised that the money was available. Standard & Poor's reported that the delay had been coordinated with the creditor bank.

This incident has highlighted the Moscow administration's concern regarding its image in the eyes of investors. Consequently, it has declared its intention to allocate, by the end of this year, $120 million from the city's Hard Currency Fund, to service the city's foreign debt. The Fund reportedly contains $268 million.

Following the adoption of the first part of the Russian Federation Tax Code that prohibits making tax payments in foreign currency, the Moscow administration developed a new mechanism to maintain the city's Hard Currency Fund. Deputy head of the Moscow administration and head of the city's Foreign Relations Department, Josef Ordzhonikidze explained that tax revenues (which constitute about 60 percent of the Fund's sources) will come into the Foreign Relations Department in roubles and subsequently be converted into dollars. Non-residents will, as before, make their rent and tax payments in foreign currency.

Ordzhonikidze said the plan calls for approximately 50 percent of the Fund's money to be spent on servicing Moscow's foreign debt, which will cost the Russian capital an estimated $150 million this year. The most difficult month will be May, during which the administration will have to make three payments totalling more than $42 million. Prior to that, on April 8, DM 45.625 million ($25.78 million) interest is due on the city's Eurobonds loan. The administration assures that the payment will be made in full and on time.

While Moscow is unlikely to confront insurmountable financial hurdles during 1999, the same can not be said for next year. The maturing Eurobonds alone will require that the city spends $500 million in 2000. By comparison, this year's city budget totals 72.7 billion roubles (approximately $3 billion). In addition, considerable amounts of municipal funds are frozen in the city's failing commercial banks, including some 1 billion roubles in payments earmarked to the Moscow budget.

"Moscow has no alternative but to keep on meeting its foreign debt obligations. If it fails to pay its debts the West will react immediately and this reaction will be extremely damaging for the city," Oleg Muzyr, Chairman of the Commission on Budget and Finance of the Moscow City Duma said last week. Currently, the draft city budget for the year 2000 contains just $300 million designated for foreign debt servicing and repayment. The administration is taking measures to find additional revenue sources.

Concerning the current year, it is quite likely that the budget's debt servicing component will go up, thanks to improved tax collection, increased revenues and intra-budget fund relocations. According to official sources, the recently introduced tax on sales will alone add more than 5 billion roubles ($200 million) to the city's budget.

This year, Moscow plans to collect 53 billion roubles in taxes (73 percent of total revenues). There is even evidence to suggest the plan will underestimate revenues. Something like this is already happening with the federal budget - its revenues are much more than expected due to the positive effect of the rouble's devaluation on the goods-producing sector of the economy. This year's borrowing limit of the Moscow administration is set at 9 billion roubles (approximately $370 million).

The dramatic increase of oil prices on the world market (from $10 to $14.50 per barrel) will have a strong positive effect on Moscow's revenues, as Russia's biggest oil holdings are registered in Moscow and pay taxes to the city's budget. Also, the increase in oil prices will stimulate Russia's imports and the largest importing companies pay taxes in Moscow.

Housing mortgages are another important element of the Moscow administration's economic policy. The aim is to support the home construction boom that the city has experienced for the last few years. The crisis and its negative effects - specifically the declining demand for flats - has placed this important branch of city's economy in jeopardy. A glut on the real estate market is pushing down the earnings of construction companies. There is a danger of massive closures and staff reductions at the enterprises that manufacture building materials. The Moscow government's mortgage programme is aimed at averting this potential crisis. The administration plans to set up an agency to insure mortgage transactions. The city will hold a controlling stake in the agency and will adopt a monitoring role to protect against fraudulent activities. The plan is to set up a number of mortgage plans, making it possible for Muscovites with medium incomes to purchase new flats.

It would be no exaggeration to say that attracting investments, primarily foreign investment, is the Moscow administration's top priority. The crisis has seen the flow of investment into Moscow diminish by 15 percent. Nevertheless, a total of $6 billion had been invested in the city in 1998. In terms of investment attraction potential, Moscow still remains the leader among the federation regions, accounting for 55 percent to 65 percent of total investment in the Russian Federation. Moscow Mayor Yuri Luzhkov noted that last year was not a successful one for the city. Now he is busy developing new ideas to boost investment, specifically a programme to provide the city's liquid assets as security. Luzhkov said hotel and tourism, perfume and cosmetics, pharmaceuticals and electronics are key strategic areas.

The Moscow administration is also inviting foreign investment in industries, which have traditionally been closed to foreigners. Transport is a good example. Recently, Luzhkov appealed to foreign financiers to invest in the development of alternative means of transport, such as mini-metro and high-speed monorails. He stressed that not a single foreign company has ever lost money in Moscow and expressed certainty that the city will remain the centre of investment activity in Russia for the next five to seven years.