Russian Federation: toward medium-term viability by World Bank

By World Bank

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But ultimately, establishing credibility and attracting the private foreign investment essential for Russia's development will depend on the strength of the Government's commitment to the reform agenda. Page 1 Chapter 1 Macroeconomic Developments since 1992 Transformation of the Russian economy under the reform program launched in 1992 has been massive, and not without turmoil. With the disappearance of most state subsidies, directed credit, and guaranteed demand, industries have been forced to cope with a fundamentally new incentive system.

Total transfers, while down significantly since 1992, continued to amount to about 5 percent of GDP in 1994. In addition, tax exemptions amounted to as much as 34 percent of GDP. Such de facto subsidies represent an unnecessary burden on the budget and inappropriate distortions in markets. While directed credits and investment grants have been cut, tax benefits appear to have taken on a larger role. Tax arrears have also increased significantly. The reduction in the overall level of support is laudable, but the shift to tax benefits represents a change to a less transparent form of support which is worrisome.

The external sector. From 1992 to 1994 Russia's non-interest current account surplus with the FSU countries fell, but was more than made up for by an expanding surplus with the rest of the world. 5 billion if interest payments are included. 8 billion. Over the 1992-94 period the capital account has registered major outflows in short-term capital (about $10 billion in 1994), illegal capital flight, and foreign debt repayment obligations that have generally not been paid (about $15 billion a year).

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