Saturday, September 19, 1998

Despite warnings, Central Bank to pump more money into economy

By ANNA DOLGOV

Associated Press

MOSCOW -- The Central Bank's plan to print more money to revive the ailing Russian economy prompted warnings Friday of hyperinflation and a return to Soviet-style restrictions.

The government wants to infuse the economy with enough rubles to ensure the nation's debt-ridden banking system does not fail and to pay off many months of back wages owed state workers and pensioners.

But economists said the government will have to introduce price controls, establish an artificial exchange rate and impose tight controls over export revenues to prevent hyperinflation.

"Once you start printing money, you have to do many other horrible things, and then it's very difficult to stop it," said Pavrolata Shtereva, fixed-income strategist at MFK Renaissance Bank in Moscow.

Already the government plans to tighten controls over foreign-currency transactions, Prime Minister Yevgeny Primakov said, speaking on Russian television.

He did not say just how much government regulation there would be but insisted the government still hopes to restore economic stability through "economic" rather than "administrative" measures.

While seeking to assure foreign investors that Moscow will meet its obligations, Primakov also urged Western lenders to fulfill their promises of aid to Russia.

The International Monetary Fund, which put together a $22.6 billion aid package to Russia this summer, said the next payment would be postponed until the government resumes market reforms.

President Boris Yeltsin's efforts to open up the market were put on hold when he fired the government of Prime Minister Sergei Kiriyenko in August.

The new government is still trying to get its feet on the ground and has yet to reveal a comprehensive economic strategy, though it has tried to improve tax collections.

Tax collections for August added up to 11.2 billion rubles -- 1 billion rubles less than in July, and 2 billion rubles less than planned, the Interfax news agency reported on Friday.

Tax service chief Boris Fyodorov said many companies were not paying because they could not get their money out of idled banks. The economic crisis has caused bank activities such as money transfers to come to a virtual standstill.

Other companies were simply stalling with their tax payments, as political uncertainty prompts speculation that the tax service will relax its efforts, Fyodorov said.

Primakov said that the government plans to introduce a monopoly on the alcohol and tobacco markets, in order to secure revenues for the federal budget. He pledged the government "will get rid of corruption and bribery once and for all."

The Central Bank announced it would lower reserve requirements for banks in a relatively sound financial position. That means the banks wouldn't have to keep as much money on hand, and could settle debts, improving the overall liquidity in the financial markets.

The Central Bank also plans to redeem treasury bills with maturities through Dec. 31, 1998, from selected Russian banks. Those treasuries had been frozen by the Central Bank last month.

Andrei Kozlov, the Central Bank first deputy chairman, said the bank would print money to pay for some treasury bills. Kozlov wouldn't say how much money would be printed, but stressed it would be strictly limited.

Fears of inflation caused the ruble to drop again Friday, from the official rate of 14.60 rubles to the dollar announced by the Central Bank on Thursday night to 16.38 on Friday night. It fell even further in trading between banks, reaching about 18.5 rubles to the dollar on Friday.

Russian stocks sank in thin trading Friday, with investors unwilling to take part in trading while the new Cabinet's economic policies remain unclear. The Russian Trading System Index fell 5.1 percent from Thursday's close.

Russia's industrial output is also shrinking. After showing signs of modest growth at the end of last year, it was 11.5 percent lower this August than during the same period last year -- the sharpest drop since 1994, the State Statistics Committee said, according to Interfax.