Fragile Russian Reforms in Danger

A defiant central bank and serious debt problems increase the country's prospects for hyperinflation

PEOPLE carrying their bank deposits to the cashier's window in a wheelbarrow. Ladies making their grocery purchases with foot-high stacks of banknotes. These scenes of uncontrolled inflation from the Weimar-era Germany in the 1920s are now haunting economists and politicians in Russia.

After months of deflationary collapse, in which production plummeted, the Russian government could at least point to one sign of progress in the implementation of its controversial market reform policies - a slowing of inflation.

The nearly 1,000-percent inflation rate dropped to a tenth of that level by this summer, bringing Russia in line with targets set by the watchful donors at the International Monetary Fund (IMF). The value of the ruble, which had dropped precipitously, showed signs of stabilizing.

But the tight-money policies of reform czar, Premier Yegor Gaidar, have been eroding under intense political pressure from industrial and farm lobbies seeking bailouts as well as from opponents of the rapid reform pace.

Clear signs have appeared this month that the government's fragile gains are in danger. The ruble has dropped again, almost by half. And inflation has already doubled in the first half of the month to an annual rate of 240 percent. The concern at the highest level is evident.

"Hyperinflation is becoming a serious threat to the reforms in the near future," Russian President Boris Yeltsin said in a speech last week to local government leaders meeting in the Volga city of Cheboksary. "Supporters of cheap credits and unrealistic social programs are pushing us into this abyss," he said.

This view is shared even by the main lobby for the state-run enterprises, the Union of Industrialists and Entrepreneurs, headed by Arkady Volsky. Loose credit

"Hyperinflation is just around the corner," the Union's chief economist Yevgeny Yasin told reporters last week at a presentation of a report on the economy. He pointed to a growth in credits in September that will be 10 times the March level. The respected economist, who also advises the Russian government, called for a return to tight credit and money policies in October and November to avert the catastrophe.

The government can lay blame for these events at the door of the Central Bank of Russia under the leadership of its new acting chief, Viktor Gerashchenko, the former head of the Soviet central bank. Since Mr. Gerashchenko took over at the beginning of July, the bank has reversed previous tight money policies, issuing huge volumes of loans to enterprises. It also publicly signaled its intention to abandon efforts to support the ruble's value at the market auctions which determine the exchange rate.

Russian reform officials have not concealed their opposition and anger toward these changes.

"The fall in ... the ruble-dollar exchange rate in the past four weeks ... was a natural reaction to the actual rise in the amount of money in circulation in the last two months of summer," Premier Gaidar told the Interfax news agency on Sept. 11. "The monetary emission in Russia significantly increased beyond the rates we had counted on."

"We certainly won't meet any [reform] targets if the present policy of the Central Bank is pursued," economist Sergei Vasilyev, head of the Economic Reform Center and a senior government adviser, told journalists. "In practice, they are acting to discredit not only the government, but the entire course of reforms."

Bank officials respond with attacks on the government's anti-inflation policy, and the targets set in agreement with the IMF, as being unattainable.

"The task of achieving monetary and financial stabilization this year was unrealistic from the very outset," Central Bank deputy head Arnold Voilukov told the daily Trud Sept. 3.

He said the IMF should allow them to pump up to 2 trillion rubles (about $10 billion) into the economy. Piling up debt

Bank officials argue they had to act to avert a collapse of production due to the huge accumulation of mutual debts between state-run enterprises and the backlog of unpaid wages to workers. The inter-enterprise debt reached a huge 3.4 trillion rubles by the beginning of July and unpaid wages amounted to 220 billion rubles. Much of the Bank's loans went to clearing those backlogged payments, bringing them down to 1.2 trillion rubles and 6 billion rubles respectively.

Industrialists union economist Mr. Yasin warns that this "avalanche" of payments will further spur inflation. And enterprises can dodge any renewed tight money policies by piling up debt between them again, he says.

The Central Bank is reportedly readying a new effort to settle the debts between enterprises in different former Soviet republics which continue to use the ruble. The bank has already increased the flow of rubles to those republics, lending which is not controlled by the Russian government. Mr. Vasilyev estimates that about 100 billion rubles are being pumped monthly into central banks in other republics.

The government is clearly setting the scene for a challenge to the Central Bank's policies at the new parliament session which opens Sept. 22. Under Russian law, the bank answers to the parliament. The previous bank head resigned under the relentless assault from the parliamentary leadership, headed by speaker Ruslan Khasbulatov, which has pushed for a slowdown in reform policies. Gerashchenko, whose nomination to the top post of the Russian Central Bank, must be confirmed by this parliament session, can

expect support from that quarter.

President Yeltsin, in his speech last week, called for the bank to be removed from the parliament's purview, either to be subordinated to the government or made completely independent. Officials are predicting some sharp battles in the parliament over the economic reform policies.

The president's stance is far from certain. He already bowed to political pressures in easing the austerity policy early this summer and bringing representatives of the industrialists lobby into the Cabinet. Already there are rumors, voiced most recently by Vice President Alexander Rutskoi, that another Cabinet reshuffle is coming in a few weeks.

The extent of the government's backing for reforms will have a critical impact on the degree of support from the IMF and other international creditors. The IMF and World Bank annual meeting begins next week and the Russians are looking for more aid, including a long-term rescheduling of its estimated $70 billion foreign debt and $3 billion in loans from the IMF, which has already lent $1 billion this year.