Reform may be a war casualty

Russia's military campaign in Chechnya, though only three weeks old, is threatening to derail the government's efforts at economic reform in 1995.

The combined costs of military operations, repairing the damage to Chechnya's oil industry and reconstructing the region's economy are estimated to run to the rouble equivalent of more than £1bn. That represents about 4 per cent of the government's expected revenue this year. If the Chechen war turns into a prolonged Russian occupation of the north Caucasian republic, the financial burden will become even heavier.

A former economics minister, Alexander Shokhin, said the government had already made large spending cuts in its draft 1995 budget. It would be difficult to impose more cuts to accommodate the costs of the Chechen campaign, he said.

The government will have little choice but to borrow money from the Russian central bank. But this will turn upside down the government's strategy of ending reliance on central bank credits to reduce inflation and secure approval for loans from the International Monetary Fund (IMF).

Evidence is emerging that the government's economic programme is fraying at the edges. Inflation fell to a monthly 4 per cent last August, the lowest since President Boris Yeltsin launched his free-market reforms in January 1992. But since then it has gone relentlessly up again, hitting 16.4 per cent in December.

A first deputy prime minister, Oleg Soskovets, put a brave face on this setback: "Regardless of certain difficulties which emerged last autumn, there is a possibility now that we can find our way out of the economic crisis. Softening reforms can only drag out the end to this crisis."

However, the softening of reforms has already started. The government drew back from its tight-money policy last month when it won approval from the State Duma, the lower house of parliament, for 5 trillion roubles (£900m) in central bank credits to cover spending in the first three months of this year. This will increase inflationary pressures and could raise doubts in the minds of IMF officials, foreign bankers and investors over the government's determination to stick to an anti-inflationary

programme.

IMF negotiators are due to meet government officials this month to discuss granting Russia $12bn (£7.75bn) in loans. The loans are essential if the government is to cover deficit spending already included in the 1995 budget. But the grant could be delayed or watered down if the IMF believes that Russia's drive against inflation is being undermined.

Russia's Economics Minister, Yevgeny Yasin, calculates the cost of restoring Chechnya's oil industry, badly damaged by the fighting, at more than £130m. Rebuilding the regional economy will cost £540m. He gave no figure for the military campaign, but itscost is bound to be several hundred million pounds.

Such estimates anger many members of the Duma, who argue that they are being asked to endorse spending cuts while permitting the government to embark on a costly and unpopular military campaign. It took 13 votes before the Duma finally approved the firstreading of the 1995 budget on 23 December. But three more readings are required, and parliamentary hostility to the government is so intense that the reform programme seems certain to come under great strain.