Russian Duma Begins Passing Reforms While Displaying Its Distrust of West
By MATTHEW BRZEZINSKI, July 16, 1998
Staff Reporter of THE WALL STREET JOURNAL
MOSCOW -- Despite grumbling that Russia is selling out to the West, the
Communist-dominated Parliament gave its nod to some of the economic
reforms the government must implement to qualify for billions of dollars in
international aid.
During the first day of debate on a radical economic overhaul, lawmakers
passed several bills aimed at both cutting and simplifying tax levies on small
businesses, and they trimmed the tax rate on corporate profits to 30%
from 35%. The program is designed to spur tax collection, encourage
greater competition and generally put Russia's fiscal house in order. The
Kremlin has promised the International Monetary Fund it will speedily
introduce the reforms in exchange for $22.6 billion in emergency loans to
shore up frazzled financial markets.
But while the Duma, as the often-recalcitrant lower house is known, gave
Western observers reason for optimism, it also shot down one proposal to
introduce a 5% consumer sales tax. Left-wing factions argued that
ordinary Russians -- many of whom haven't been paid in months can't
afford it. The rejection of the sales tax was the first sign that President
Boris Yeltsin would probably be forced to enact by decree any parts of
the government's "anticrisis" package that hit people's pocketbooks or call
for the big cuts in spending sought by the IMF.
Claims of Secret Clause
"Deputies don't want to share the responsibility for politically unpopular
measures," says Sergei Markov, director of the Institute for Political
Studies in Moscow. "At the same time, the Duma does not want be held
responsible for sabotaging the bailout."
On Wednesday, the Duma demanded assurances that the IMF-led
financial rescue effort didn't include secret clauses to relinquish Russian
territory. Finance Minister Mikhail Zadornov called the claim, made by
both Communist and nationalist legislators, "gibberish."
In another sign of distrust of Western intentions, lawmakers set back
hopes for international oil concerns by adopting a bill that limits foreign
participation to 20% of total natural resources exploited under Production
Sharing Agreements. The PSAs, which regulate key taxation issues, are a
standard practice in the oil, gold and diamond industries. Parliament has
been reluctant to grant Western oil companies PSAs because many
left-wing lawmakers complain that the West wants to steal Russia's natural
wealth.
Markets Stabilize
With both good and bad news coming out of the Parliament, some of the
euphoria that has swept Russia's markets this week evaporated. The ruble
was down slightly against the dollar Wednesday, though it was within the
central bank's daily trading band. Yields on one-year Treasurys were
unchanged at 55%, despite the kickoff of an ambitious debt-restructuring
program. Under the plan, the government is offering investors the option to
swap their short-term ruble debt for seven- and 20-year Eurobonds at an
auction in which bidding ends Friday. The government will offer the dollar
bonds at a minimum of 8.375 percentage points above the yield on U.S.
Treasurys as part of an IMF-endorsed effort to shift immediate
debt-servicing burdens to a longer period of time.
Stocks, which spiked 26% in the two sessions since Monday's IMF deal,
lost some steam Wednesday, but still managed to rise. The benchmark
Russian Trading System Index climbed 3.8% to close at 190.56 points as
investors began looking ahead at the difficult reform promises Russia must
fulfill.
"After the initial jubilation [over the IMF package], people are now asking
what's next?" says Per Mellstrom, head of research at Bruinswick
Warburg investment house in Moscow. "They want to know that Russia
won't be back in the same crisis in six months."
The picture should get clearer Thursday as the Duma resumes debating
economic reforms. The question now is whether Parliament will get
through all 20 major measures that must be enacted before the IMF board
meets Monday to approve the release of funds to Russia.
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