All Eyes on the War, Economy Neglected

The fact that nobody has talked much about economic reform over the past couple of weeks is probably a sign of things to come for the next year.


With Russia involved in a civil war worse than last year's October events, which could spread to cover the whole north Caucasus region, it is not surprising that economics takes second place.


But even if the war in Chechnya can be brought to some sort of conclusion and the threat of serious unrest in the Russian Army is avoided, the war may already have ended any hopes for serious reform for a long time.


Not least, the invasion will be incredibly expensive at a time when Russia was supposed to be cutting its budget deficit.


The cost of the war, and the bribes the Russian government is now offering to placate the citizens of the region, will be enormous. They will require major adjustments to the crucial 1995 draft budget and will strengthen the hand of the military industrial complex, which is sure to want to push up defense spending generally.


But the real economic damage from the war could be in its political effects in Moscow.


The war has reignited the confrontation between the legislature and President Boris Yeltsin, even though the parliament has so far failed to take any coordinated action in protest.


In theory, the government is supposed to be winning support for its crucial 1995 draft budget in the Duma.


A few months ago, it was hoped that the budget would actually be passed this year.


Given the almost total opposition to the government in the Duma, it is unlikely that a budget could be pushed through the legislature.


Yeltsin himself will have less and less personal energy to devote to economic reform.


Unless the war ends in some obvious success, he will be politically weakened and will lose the authority needed to push through reform in the face of opposition from the lobbies.


For example, one major economic reform already appears to have been won by conservatives in the government who want to increase state regulation. They have apparently forced a major reversal on a decree, signed by Yeltsin himself, which was supposed to free export restrictions on oil and oil products from Jan. 1.


The World Bank ranks the export quotas issue alongside the 1995 draft budget in terms of its importance for the Russian economy. The bank is threatening to delay a $600 million loan to Russia which has been factored in to the budget over the issue.


But the Foreign Trade Ministry is talking about replacing export restrictions with compulsory deliveries of oil onto the domestic market. This is a twisted bureaucratic double-speak for recreating quotas in another form.


The worrying thing about a backdown on oil export quotas and licenses is that they show the opposition to reform is now deeply entrenched within the government and not something forced on it from outside.


Unlike many other issues, such as the budget, the government does not need parliamentary or presidential approval to end export quotas.


The government has all the power it needs to end export quotas. Yeltsin has already given his approval to canceling the restrictions.


The only hopeful sign in the past month is that ace reformer Anatoly Chubais now has the grand title of Deputy Prime Minister for Economic Reform. But Chubais has not usually started a fight unless he was sure he could win it.


Significantly, he has kept fairly quiet on both the budget and the oil exports issues.





Geoff Winestock is a Moscow-based correspondent for the Journal of Commerce.