The government's draft budget for this year, which passed its thirdreading in parliament last Friday, is largely a document for external use.One of the documents principal objectives is to convince the InternationalMonetary Fund to hand over a stalled tranche of credit amounting to $4.5billion.

Primary budget targets (operating surplus without debt servicing andrepayment expenses) of 1.7 percent is an impressive figure for Russia,but absolutely inadequate given the need to pay $17.5 billion in servicingand repayment of foreign debts by the end of the year.

Nonetheless, the government continued trying to persuade an IMF missionlast week that its proposed budget is realistic at the same time that thecountry is considering defaulting on former USSR debt.

Russia has come to view the debts it inherited from the former USSRas secondary. But having failed to meet its London Club payment deadlines,Russia continues to service debts made since the fall of the Soviet Union.Last week, $320.5 million was
remitted to pay coupons on Russian 7- and 20-year Eurobonds.

According to sources close to the government, the IMF is leaning towardgranting Russia a loan in March worth probably only $1.5 to 2 billion.

Sans Change

In many instances, the approach Prime Minister Evgenii Primakov's administrationto economics and finance resembles former Prime Minister Viktor Chernomyrdin's.Specifically, the government is once again pushing the State Duma to adoptyet another austere and unrealistic budget. The main difference in thepolitical situation, however, is that the Communist-led Duma is now alltoo happy to help its fellow party members in the cabinet.

Not a single viable budget - potentially realistic let alone actuallyimplemented - has been passed in the post-Soviet period. The branches ofthe government have always used budgets for political purposes.

The fact that the last two budgets were adopted late created few inconveniencesand problems for the legislature or the government. Indeed, the state budgethas virtually ceased to influence the country's economic situation.

In an effort to obtain credits that would help postpone the beginningof painful and unpopular reforms, the government has usually used the budgetprimarily as an instrument to convince international financial organizationsof Russia's seriousness about economic reform.

Former First Deputy Prime Minister Anatolii Chubais even admitted lastyear that previous administrations often resorted to falsification, suchas presenting incorrect tax collection figures.

It has long been common knowledge that the treasury's so-called TaxExemption Notes and 'mutual debt settlement' schemes - which failed togive the budget a single kopek - were carried out, in part, for the sakeof pro forma reports on budget fulfillment. And the practice helped convincethe IMF to continue giving credits.

The Current Budget

The 1999 state budget looks hauntingly similar to previous incarnations.The government, for example, says it anticipates GDP growth of approximately2 percent in the second half of this year. But given the country's presenteconomic situation, this forecast cannot be called anything but wishfulthinking.

The rouble's average exchange rate is set at 21.5 rubles for one U.S.dollar. But already in January, the national currency's value has sunkeven lower. The average speed of ruble devaluation is so far at least doublethe figure set by the draft budget. It follows that the budget's projectedannual inflation rate figure of 30 percent is similarly unrealistic.

And high inflation will make the burden of servicing foreign debt evenheavier; expenses already come to almost 30 percent of the budget's totalexpenditure.

There was little action in the third reading of the budget held on 29January, except for a little squabble begun by the Kremlin.
The Duma has amended the budget to slash the federal government's allocationsby 40 percent, almost all in the sphere of the presidential administration.

At the same time, the Duma planned to only reduce its budget by 4.3percent. The president's representative Aleksandr Kotenkov spoke againstsuch an 'injustice' and suggested another amendment to adopt a flat reductionof 11.6 percent. He threatened a presidential veto if that was not done.

But  deputies rejected the presidential proposal and veto threat.

Bargaining

Bargaining is underway between the IMF and the government. The governmentis trying to shift the burden of debt servicing from the so-called productionsector to cash from more IMF credits. But the IMF opposes this tactic,as it has done in previous years.

Levers of influence are also familiar. ÒI don't want them togive my country more credits. We cannot go deeper into debt and live offfuture generations," Federation Council Speaker and Oryol Governor EgorStroev recently declared.

Speaking at a press conference on January 26, former Finance MinisterAlexander Livshits said that it is time for Russia and the IMF to forgetall previous agreements and claims since Russia became a different countryafter August 17.

The government, he stressed, should not even consider the failure ofreceiving IMF credits  a possibility, . 'Flexibility,' he added, shouldbe limited to whether the government manages to obtain a long- or short-termcredit.

Tensions Grow

But this year's dispute between Russia and the IMF has become much moreheated than in the past. The August its crisis - after which the IMF frozepromised loans - aggravated relations acutely and raised questions aboutthe IMF's work in Russia. Since then, the Primakov government has takena much tougher stance against the fund than previous administrations.

The IMF mission that recently arrived in Moscow, headed by Jorge Marquez-Ruarte,wants the government to answer a number of unpleasant questions. For example,the IMF demands daily reports on the Central Bank's foreign currency interventionsbeginning July 1, 1998.

The IMF also wants to know when the government plans to lift "the 100percent security requirement on credits given by residents of Russia toresidents of Latvia" imposed in 1998. During the last several years Latviahas been the main channel of capital flight from Russia.

What makes the current Russia-IMF talks and the process of budget adoptionunique is the very real danger of Russia's sovereign debt default. By refusingto grant further credits, the IMF will weaken Russia's chances of obtainingdebt restructuring from the Paris and London Clubs of creditors. "All ourlenders view IMF decisions as their guideline," Duma Budget Committee ChairmanAleksandr Zhukov said recently.

Western creditors face a clear dilemma: either grant Russia debt restructuringor declare the country in default. Russia already failed to meet a paymentdeadline to the London Club in late December. And a number of Russia'stop politicians have repeatedly stressed that in any case Russia will bevirtually unable to pay the $17.5 billion it will owe at the end of thisyear.
Now it remains to be seen if President Yeltsin will veto the budgetor agree to it in order to satisfy the International Monetary Fund.