Russia Slows Economic Reforms To Avert Collapse of Industry

LAST week Boris Yeltsin went out for one of his periodic tours of the provinces. As usual on such trips, the Russian president made policy as he went along, dealing with local problems with characteristic brusque authority.

In the southern Russian region of Krasnodar, for example, the vast Rostselmash agricultural machinery plant, like many such subsidized state-run enterprises across Russia, is on the verge of financial collapse. In Moscow, Economy Minister Andrei Nechayev, one of the bright young market reformers around Prime Minister Yegor Gaidar, had said that Rostselmash may be closed down.

But on the scene, President Yeltin dismissed the statement of his minister as "absurd," according to an official Itar-Tass report, and promised new aid to the plant instead.

This incident captures the growing influence of policies, and the political forces behind them, that seek to significantly slow the pace of economic reform in Russia. Economically, the recently declared second phase of the reform plan preserves the grand objectives of shifting to a market economy, but with an emphasis on averting the collapse of state-run industry and agriculture, even in defiance of Western pressure. Politically, this is reflected in the formation of a de facto coalition government incl uding both reformers under economic czar Gaidar and the industrial managers.

The first phase, which began in January, combined the freeing of state-set prices on most goods with tough financial austerity, curbing the budget deficit and reducing subsidies to state sector firms. The aim was to bring hyperinflation under control, stabilize the ruble, and move to make it a convertible currency, a step considered essential to bringing in large-scale foreign investment.

The second phase shifts the emphasis from financial stabilization to production stabilization, loosening the control on credit, and allowing more deficit spending in order to prop up ailing agricultural and industrial firms. Removal of the subsidies on energy prices, the last bastion of state price setting, is postponed, as is an attempt to achieve ruble convertibility by this summer.

"We want to combine financial stabilization with structural changes, with the implementation of an industrial policy," says Alexander Vladislavlev, co-chairman of the recently formed Renewal Party which represents the interests of the Russian Union of Manufacturers and Entrepreneurs.

"What will be the motor of renewing industry if it is ruined during the process of financial stabilization?" Vladislavlev asks rhetorically, referring to the collapse in production during the first half of this year. "The market? We do not have a market. We don't even have the civilized attributes of a market," he argues. The country lacks the exchanges, the banking system, and the entrepreneurs with the capital to invest, he says. Encouraging entrepreneurship

Therefore, the industrialist argues, the state has to encourage entrepreneurship with tax breaks for investment, with aid to small business, with credits for industry and with a privatization program that essentially gives ownership to the current factory directors, along with their employees.

To do otherwise is to risk popular uprising.

"How do our people understand the market economy now?" Vladislavlev asks. "Four months without salary, a 30-40 times increase in prices and unemployment," he answers. The absence of strikes and other disturbances is only "thanks to the factory directors," he contends, who have managed to keep workers cool until now.

In June, the Renewal Party formed the Civic Union, an alliance with the Democratic Party of Russia and the Peoples' Party of Free Russia, a grouping of liberal ex-Communists headed by Russian Vice President Alexander Rutskoi. Last week the Renewal Party announced a broader alliance with the new entrepreneurial class of stock and commodities brokers whose leader, Konstantin Borovoi, the wealthy founder of the largest exchange in the country, formed the Party of Economic Freedom in June. "The creation of t he Civic Union signals that very influential forces are now uniting in clear structures to influence a government which has no social base," comments Mikhail Berger, the respected economics editor of the daily Izvestia. "It is not clear if it will succeed Gaidar's team but they have organized a group that makes the ... radical market reform very obscure." Government reshuffle

The first effects of this pressure on the government were evident during the meeting of the Russian Congress of People's Deputies, the country's supreme legislature, in April. At that time the government offered some new credits to industry and a reshuffle brought some representatives of the industry lobby into the government, including Vice Premier Vladimir Shumeiko and Vice Premier Georgy Khizha.

A modification of the reform plan drafted in June by Yvgeny Yasin, the chief economist of the Union of Manufacturers was adopted. Under pressure from the parliament, where conservative forces are strong, the government agreed in July to a 1992 budget deficit of 950 billion rubles (about $7 billion), far higher than the 690 billion ruble deficit proposed by Gaidar in June. The government is also preparing to write off a huge mass of debts between enterprises, estimated at 3 trillion rubles, that has accum ulated this year.

The appointment last week of the former head of the Soviet state bank, Viktor Gerashchenko, as acting head of the Russian Central Bank, further soldifies this shift. The banker stated he would loosen credit controls, providing preferential credits to key industries. And he has abandoned attempts to shore up the ruble's value by selling dollars in the market, saying convertibility should be put off until the economy is stabilized. Pressure for further shifts

But the Civic Union and its allies are already negotiating with the government for more changes, says Vladislavlev. "We are not an opposition," he insists, but seek what are politely called "personnel changes" in the government. They have a list of Cabinet members they want removed, including liberal Foreign Minister Kozyrev and Foreign Trade Minister Pyotr Aven. Another popular target is Yeltsin adviser Gennady Burbulis, who is assailed as a radical.

As for Gaidar, "the optimum combination now is Volsky as prime minister and Gaidar as chairman of a committee on economic reform," he says.

The removal of Gaidar as deputy prime minister is doubtful, Berger says, as his presence is neccessary to preserve the credibility of reforms in the eyes of Western creditors and because Yeltsin is still comfortable with his leadership. But the acute observer of the Russian scene does not rule out the possibility that Gaidar might resign out of frustration.

Meanwhile, the radical elements of the democratic movement view these developments with increasing alarm, charging the formation of a new nomenklatura, as the Communist Party elite was called. They point to the growing role of the Security Council, a newly formed body in the Russian presidency headed by Yuri Skokov, a veteran of the defense industry. Some talk of this as the base for a new coup by conservatives and Russian nationalists.

The best defense of the reforms is to broaden the base of support for them, retorts Vladislavlev. "The only defense against a coup is us," he says.