Yeltsin decree deals blow to reform hopes

INFLATION, the Achilles' heel of Russia's economy, is expected to rise again following a presidential decree that grants 3,500bn roubles ( pounds 1.1bn) in state credits to industrial enterprises. The decree, signed by President Boris Yeltsin on 10 August, authorises firms to borrow the money until the end of this year for investment or for converting production from military to civilian uses.

Government ministers said the credits had been accounted for in Russia's 1994 budget and would not cause the money supply to shoot out of control. But dealers on Moscow's foreign exchange market interpreted it as a bad sign and marked the rouble down. It slipped this week to 2,117 against the dollar.

The Prime Minister, Viktor Chernomyrdin, has reduced inflation by requiring the Central Bank to tighten monetary policy and by raising interest rates. Annual inflation ran at 1,865 per cent in 1992 and 947 per cent in 1993. This year Mr Chernomyrdin has cut the monthly rate to about 5 per cent. However, a Deputy Economics Minister, Sergei Ignatyev, has said inflation could rise this autumn to a monthly rate of 10 per cent. Analysts attribute the anticipated increase to big government emissions of cash and credits and to the high prices farmers are demanding for grain in the harvest.

The inability to curb inflation has been the single biggest failure of Russia's economic reform programme. Until this year the authorities offered huge amounts of easy money to inefficient state industries, partly to prevent them from throwing millions of people out of work.

Recently the government has kept the budget deficit close to levels agreed with the International Monetary Fund. While this has improved Russia's chances of securing IMF aid, it has increased unemployment and has caused industrial production in the first half of this year to drop by 25.8 per cent compared with the same period of 1993. The fragile health of Russia's economy may explain why the Foreign Trade Minister, Oleg Davydov, on Wednesday suggested the West should write off part of Russia's dollars 80bn ( pounds 52bn) foreign debt. 'Bulgaria and Poland have had 50 per cent of their debts written off, so why not do the same for Russia?' he said.

Russia has not found it easy to repay its foreign debt, mostly inherited from the former Soviet Union. But its negotiations with Western creditors have centred on rescheduling payments rather than cancelling debts.