Russia takes a bowl to EU

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The Independent Online
RUSSIAN Prime Minister Yevgeny Primakov asked European Commission President Jacques Santer and other EC officials visiting Moscow on Friday for food aid and help in obtaining finance to cover Russia's budget deficit.

Commission officials said donations of food are being considered, though new loans from the European Union were not discussed. Mr Primakov also said Russia expects to reach agreement with bondholders, mainly European and US banks, on a new restructuring plan for its defaulted debt by the end of the month.

The Russian government is turning to the European Union for help, after losing most of its other financing options, as it tries to fill a gaping hole in its budget and overcome threatened food shortages in remote regions. "We want to develop a socially oriented economy," said Mr Primakov. "But I don't know yet the sources of financing for the programme which we want to bring to life."

Facing a budget deficit in the fourth quarter that could exceed 9 per cent of gross domestic product, and few financing options after defaulting in August on more than $40bn (pounds 23.5bn) of government bonds, Russia is seeking help wherever it can find it. Mr Primakov's government is continuing to appeal to the International Monetary Fund, insisting it cannot put together an economic plan until the IMF says whether it will release a $4.3bn installment of Russia's loan. The IMF says it will not make the payment until it sees the economic plan.

"The one possibility is the printing of money," said Eric Kraus, head of Dresdner Kleinwort Benson's Moscow fixed-income desk. "The question is whether this is going to be money backed with reserves from the IMF, which won't be inflationary, or an unbacked rouble emission, which will be either inflationary or hyperinflationary."

Mr Primakov said the release of the IMF loan installment no longer depends on the government. "Officials abroad know our intentions," he said. "If we don't get the loan payment, then we will have to take alternative decisions."

Analysts do not expect the IMF to release the money. "They are trying to play, rather clumsily, a game of cat and mouse with the IMF, saying they are unable to put together an plan until they know they'll get funding," said Mr Kraus. "Needless to say, they won't get the funding without an economic plan."

Russia also said it is ready to work out priority economic and financial measures with the European Union that could be approved at a Russia-EU summit in Vienna on 27-28 October. The European Commission did not promise Russia any new money, but Mr Santer said it will re-orient its programme of technical assistance, Tacis, to help Russia address its financial woes.

EU finance ministers meeting in Luxembourg on Monday are expected to turn down calls for new loans to Russia by the European Investment Bank, the EU's soft-loan arm, and for general support for Russia from the broader EU budget.

Mr Primakov said the government will announce a plan to restructure its Treasury debt by the end of October, a month later than initially planned. He reaffirmed earlier promises that the government would treat all investors equally in the debt restructuring. Previously, foreign investors have objected to government plans that would have given preferential treatment to domestic banks.

Russian legislators warned also that government spending plans are insufficient to stave off fuel and food shortages in the country's northern regions, where winter has already begun.

Imports to Russia fell 45.5 per cent in September from August, reducing Russia's food supply, half of which is imported. This year's harvest was the worst since the 1950s, according to officials.

Russia has also made "preliminary inquiries" about a possible food aid package from the US. Chris Goldthwait, manager of the US Department of Agriculture's export sales programmes in Washington, said last week the department had had preliminary talks with Russian officials. Russia asked for as much as 3 million tonnes of US wheat, 1.5 million tonnes of corn, 500,000 tonnes of soybean meal, and 100,000 tonnes of meat.

The Finance Minister, Mikhail Zasdornov, said the fourth-quarter budget assumes Russia will receive $2.4bn in international financing to help pay wages and service its foreign debt.

If Russia fails to secure financing, its scheduled foreign debt payments will exceed its ability to pay by 25.1bn roubles (pounds 1bn). Wages and pensions will not be indexed to the consumer price index, according to the proposed new budget, to avoid fuelling inflation.

The government will also impose export duties on oil and natural gas and increase excise taxes on other products to raise revenue. The budget assumes an exchange rate of 20-28 roubles per dollar by the year end.

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