The Russian government has high fixed costs for items ranging from military expenditures to the wages of railroad workers, and tax income is inadequate to meet these obligations.
Where the future is concerned, Russia's borrowing choices can be reduced to three:
- It can borrow newly printed money from its central bank. This is out, since it would soon return Russia to hyperinflation.
- It could borrow from the pool of Russian savings. This is also out, because Russian savings are almost nonexistent, and those that do exist are increasingly stuck under the mattress, in the form of hundred-dollar bills.
- It could continue to borrow abroad. Where private investment and commercial banks are concerned, this is also now virtually impossible due to a moratorium on and restructuring of debt. Where public funds are concerned, even the International Monetary Fund has adopted a wait-and-see policy.
So the borrowing well has run dry. What remains? Begin to restore confidence by increasing taxes, ideally in the form of sales taxes that can be collected at the point of sale. This can only be done with the agreement of the State Duma, the lower house of Russia's parliament.
But who can sell Duma deputies on this? Yeltsin's answer: Viktor Chernomyrdin. The old-guard Communists who dominate the Duma regard him as one of their boys - which he is. Will it work? Partially.
The Russian drama will continue for many months, lurching from crisis to crisis. But it will not result in the end of the world for the Russians and certainly not for us. So keep all this in perspective.
Written By Paul E. Erdman, CBS MarketWatch economist and columnist