West fears for Russian reforms: Hyperinflation predicted as Chernomyrdin promises 'non-monetarist' approach to tackling economy

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The Independent Online
AT THE first meeting of the new Russian cabinet yesterday, the Prime Minister, Viktor Chernomyrdin, said priority must be given to developing good relations with parliament and to exploring ways of assisting ailing industry.

While all agree that Russia needs political harmony and productive factories, Mr Chernomyrdin's words were likely to confirm the worst fears of both Moscow's monetarists and their Western supporters that the country is about to throw away the hard-won fruits of two years of reform and slide into hyperinflation.

Those who would Westernise Russia reacted negatively yesterday to Thursday's formation of a cabinet of slow-track reformers and conservatives. 'The latest reshuffles in the government are extremely dangerous,' said the reformist mayor of St Petersburg, Anatoly Sobchak. 'I have the impression that government statements are now reminiscent of those by Zhirinovsky.' He was referring to Vladimir Zhirinov sky, leader of the extreme nationalist Liberal Democratic Party (LDP), who became the real winner of December's parliamentary elections after exploiting public discontent with austerity.

The pro-Western Russian press was equally critical of the cabinet changes which left only one radical, the Privatisation Minister, Anatoly Chubais, in place. The daily Sevodya spoke of a 'forced compromise' between Mr Chernomyrdin and President Boris Yeltsin and predicted that 'events will continue to develop chaotically despite declarations that reform is going on'. The US and Germany issued cautious statements of support for Mr Yeltsin which suggested they were not happy with developments. An International Monetary Fund team seemed likely to postpone a visit to Moscow to discuss granting the next installment of a loan to Russia. And the rouble was only prevented from plunging further on nervous Moscow markets because the Central Bank intervened to support it at a rate of 1,544 to one US dollar.

At his press conference on Thursday, Mr Chernomyrdin promised to continue the fight against inflation, which the monetarists had brought down to 12 per cent a month in December, but he said the battle would in future be fought using 'non-monetarist' methods. Boris Fyodorov, the Finance Minister who has quit the government together with the radical Economics Minister, Yegor Gaidar, says he does not know what Mr Chernomyrdin means by this and Western experts share his doubts.

One said yesterday it was understandable that Russia wanted to reform in its own way instead of blindly following the West, but international experience showed that inflation could only be curbed by controlling the budget deficit and credit emissions. Mr Chernomyrdin might try a prices and incomes freeze but this would not work in the long-term. Viktor Gerashchenko, written off by the US economist Jeffrey Sachs as 'the world's worst central banker', might also attempt to fix an exchange rate for the rouble but this would only encourage the black market.

Even if Mr Chernomyrdin does very little, inflation is likely to rise in the absence of Mr Fyodorov firmly holding it back. But if, under pressure from the parliament dominated by hardliners, the government starts to spend heavily on social welfare and the propping up of unviable industry, the budget deficit will rip. The temptation to spend is great because millions of Russians are living in dire poverty and mass unemployment is just around the corner if workers, already on short-time in unproductive factories, are laid off. The pressure will be enormous from parliament, where Vladimir Gusev, a member of Mr Zhirinovsky's LDP, has been chosen to head the committee for industry. The daily Izvestia is not confident the cabinet has the will to resist. 'The government of reformers has ceased to exist in Russia,' it said. 'It is replaced by directors and apparatchiks who know only how to administer and issue credits.'

But perhaps Mr Chernomyrdin will yet surpise us. Last year, when he took over the government, gloomy predictions were made about him but he worked with reformers when he understood that the state of the economy left him with no other choice. The West has in the past made the mistake of investing its hopes in individuals so perhaps it should not lament the departure of Mr Gaidar and Mr Fyodorov too much. Mr Yeltsin's aide, Viktor Ilyushin, reassured the world again yesterday that his boss was not abandoning serious reform and advised: 'Wait and see before you judge.'

(Photograph omitted)