As 63-year-old pensioner Yelena Averenov spent hours lined up in front of a state-run Moscow butcher store, waiting for a rapidly dwindling supply of sausages, her country’s leaders were heatedly debating measures that would make shopping an even more difficult experience. Still, Averenov was lucky: there was no riot at her store. In other parts of Moscow last week, truncheon-wielding policemen had to be called in to restore order as consumers fought to buy up food supplies before the govern-
ment’s plan to raise some prices takes effect on July 1. The increases, part of a sweeping program to cut the Soviet deficit and introduce a limited free market, also met with opposition in the Soviet parliament, where deputies postponed a vote on the issue until this week. But Soviet Prime Minister Nikolai Ryzhkov underscored just how critical the reforms are when he told parliament that the country is close to bankruptcy and that any further delay would be disastrous. Said Ryzhkov: “We have no more gold to buy grain.”
Ryzhkov’s stark admission that the Soviet economy may no longer be able to feed its people took place as Soviet President Mikhail
Gorbachev received a warm reception _
in North America, where he met Prime Minister Brian Mulroney in Ottawa and President George Bush in Washington. In Ottawa, Canada granted a $500-million line of credit to the Soviets to help finance critically needed imports. Canadian officials also pressed Gorbachev to buy more wheat from Canada after the current fiveyear sales agreement for 25 million tons of grain expires next year. But because the U.S.S.R.’s foreign-currency reserves and gold stocks have been dramatically depleted to pay for Western goods and services, the Soviets may not be able to pay for new wheat shipments or meet their current bills from foreign suppliers. As well, the deeply entrenched opposition within the U.S.S.R. to even the initial stages of economic reform is a setback for Western businessmen who are pressing for full convertibility of
THE SOVIET UNION IS EMBARKING ON ECONOMIC REFORMS AMID FEARS OF ECONOMIC CHAOS
the ruble to improve their chances of making a profit from their Soviet investments.
Averenov, and other Soviet citizens who last week had to produce documentation showing that they were citizens of Moscow before they were allowed to purchase goods in the city, expressed concern that further economic reforms could plunge the U.S.S.R. into deeper economic chaos. Said Averenov: “I am afraid of all this. I have only a pensioner’s income.” Under the proposed five-year economic plan, 60 per cent of prices will still be set by the
state, 25 per cent will float within a prescribed range, and only the remaining 15 per cent will be completely free. But because of the fears expressed by Averenov and thousands of others, the proposed changes fall short of the fullblown free-market approach introduced last year in Poland, where state price controls were lifted almost overnight, causing prices to skyrocket.
To cushion the blow of any resulting
economic disruption, the government proposes to pay unemployment benefits to displaced workers and index wages to compensate for inflation. Said Nikolai Petrakov, Gorbachev’s personal economic adviser: “The Poles prefer high prices to empty shelves. In this country, people accept rationing coupons and standing in line—especially during work time.” As well as deeply rooted opposition among Soviet citizens used to fixed, low prices for the few goods that are available, Gorbachev faces intense political opposition to his new economic measures. On the one hand, free-market advocates in the Soviet parliament, such as Boris Yeltsin, 59, the new president of the Russian republic, say that the federal government’s plan does not lift state controls on the Soviet economy quickly enough. On the other hand, Communist party
hard-liners want to maintain rigid state controls, and trade union groups demand protection against unemployment and inflation.
Overall, there is no firm evidence that perestroika (restructuring) is making any positive impact in any sector of the economy. Indeed, a prominent Soviet economist recently told a conference sponsored by the American Enterprise Institute in Washington, which included scholars from American universities and economic analysts from the U.S. Central Intelligence Agency, that the Soviet economy is much weaker than either the Kremlin or the CIA had earlier indicated. The CIA had estimated that the Soviet gross national product is about half that of the United States, which was $6.2 trillion in 1989. But Viktor Belkin, an economist from the Soviet Academy of Sciences, said that the U.S.S.R.’s output was actually less than 30 per cent of that of the United States. He added that his country’s economic problems are exacerbated by the rundown of reserves.
Those reserves are being eaten up by debt repayments to foreign banks, which hold a growing proportion of the Soviet national debt. The foreign debt, according to Kenneth McCarthy, senior vice-president and director of research at New York City-based private forecasting agency Rinfret Associates Inc., has more than doubled to $49.1 billion from $23.2 billion in 1980. As a result, interest payments
and other service costs have climbed to a total of about $9.3 billion a year from $7.2 billion in 1980. McCarthy added that the country now devotes about 22 per cent of its overall export earnings to foreign debt service, up from 15 per cent in 1984.
Still, the strongest indication of how close the Soviet Union is to an economic breakdown is the depletion of gold reserves, which stood at 74.56 million troy ounces in 1987. McCarthy said that, rather than spend their dwindling reserves on grain, the Soviets want to use gold to revive the economy by buying more productive assets, such as modem fabricating plants.
To replenish the reserves, Moscow has accelerated the export of its domestically mined bullion. Although the Soviets decline to release figures of official gold sales or production, they are widely estimated to be the world’s secondlargest producer, after South Africa. Gold traders in Zurich said that the Soviets dumped an estimated $1 billion worth of gold on the market last month to raise cash to pay for grain imports and to service the country’s debt.
Canada’s agreement to extend a new twoyear, $500-million line of credit to the Soviet Bank for Foreign Economic Affairs will also help. Under the plan, the federal government’s Export Development Corp. will finance the business transactions between Canadian
exporters and Soviet importers for up to 85 per cent of the value of the deal. The EDC will pay the Canadian exporters on behalf of the Soviets and later collect repayment from the Soviets. By doing this, the money never leaves Canada and can be paid back by the Soviets as late as 1999.
Canadian wheat farmers are among those who have the most to lose if the Kremlin cannot increase the reserves. Last year, Canada shipped almost two million tons of wheat to the Soviets, accounting for about threequarters of Canada’s $688 million in total exports to the country. Holding 26.8 per cent of the Soviet market for wheat imports, Canada has the largest share of any foreign country, ahead of even the United States, which holds 26.4 per cent. In the past, Moscow has paid for those imports by transferring hard currency reserves to Western banks. Although Canadian wheat was still moving to the U.S.S.R. last week,
Canadian Wheat Board officials declined to discuss whether the current gold reserve crisis has delayed payments from the Soviets.
In addition to Canadian farmers, exporters and business executives who invested in the early stages of perestroika are also nervously watching the Soviet economy. Last week, Aluma Systems Corp., a division of the giant Toronto-based condominium developer Tridel Ltd., received a $550,000 payment for the Soviets’ share of a $2.2-million, 50-50 jointventure partnership from the Foreign Economic Affairs bank in payment for construction equipment that will be shipped to Leningrad later this year.
Aluma signed a joint-venture agreement with the city of Leningrad’s construction committee in July, 1989, to market aluminum and concrete panels for three Leningrad apartment buildings. Peter Antonoff, Aluma’s Torontobased liaison officer for Soviet projects, said that his company received $500,000 last fall as part of the agreement, and the second $550,000 was received on schedule last week. However, Antonoff said that, because of the continuing economic uncertainty in the U.S.S.R., “we hope to get out of the hard currency and, instead, manufacture products in the Soviet Union that we can sell abroad.”
Meanwhile, the delay in making the ruble convertible has set back the time when Canadian firms involved in joint ventures with Soviet partners will be able to begin patriating any profits. The giant Markham, Ont.-based autoparts manufacturer Magna International Inc., for one, invested $5 million in 1988 in a plastic-
parts plant in the Ukrainian city of Zaporozh’e.
Last week, however, Magna chairman Frank Stronach told Maclean ’s that the current crisis is worrisome and that it could lead to further economic deterioration in the Soviet Union.
Said Stronach: “It has a ripple effect.”
Despite its historical reputation for paying
its bills on time—it has never reneged on a debt—there are signs that the Soviet Union is now beginning to miss some dates for repayment. Last year, the Soviet educational commission suspended a $755-million order for 300,000 computers for classroom use from large Western computer firm. As well, wool
producers in Australia and New Zealand say that Moscow owes them $180 million for shipments that they have already made.
But waiting for payments from the U.S.S.R. may become the norm for Western governments and businessmen as Gorbachev carefully moves the Soviet economy away from more than seven decades of strict state control and planning. Most Soviet watchers say that Gorbachev will proceed with gradual economic reforms and continue to reject pressure for even more dramatic measures, such as the free-market reforms now being pursued in Poland. Prof. Hugh Neary, an expert in the Soviet economy at the University of British Columbia in Vancouver, agrees, saying that many Soviets now refer to Gorbachev’s slow, painful approach to economics as “chemotherapy.” Added Neary: “It is poison but, in small doses, it attacks the disease.”
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