spending over 1995-97, setting a bad example for enterprises to follow, and giving them an incentive to deliberately run up tax arrears that could be settled with lower cost through offsets (which incorporated tax forgiveness through the use of inflated prices). This was a major factor legitimizing tax arrears, and contributing to the persistent shortfall of cash taxes over 1996-98.2o Table 3: Offsets in the Federal Budget on Cash Basis (billion of rubles)

|Year<br>__<br>__<br>_<br>|<br>KNO<br>|<br>DM0<br>_<br>__<br>_<br>_|<br>RMO<br>_<br>_<br>_|<br>TF|<br>Unidentified<br>_<br>_<br>_<br>_<br>_<br>|<br>Totail<br>offsets<br>_<br>_<br>_<br>_|<br>TOWa<br>revenu||<br>Share of<br>offsets in<br>revenues,<br>**percent**|
|---|---|---|---|---|---|---|---|---|
|1994<br>|9<br>|_||||9.0|81.7|11.0|
|1995<br>|21.8<br>|||||21.8|210.6|10.4|
|1996<br>|30.9|23.9<br>|||2.7|57.5|287.6|20.0|
|1997<br>||62.0|24.5||2.1<br>|88.6|371.2|23.9|
|1998|||19.0|21.8|1|40.8|320.8|12.7|

_Source: MoF, State Tax Service, authors' estimates._ An emergency tax commission, the VChK, chaired by the Prime Minister, was established in October 1996 to combat tax evasion. It intensified its efforts towards the end of 1997, after the first shock from the Asian crisis, which coincided with a tighter stance by the IFIs towards Russia precisely on the tax collection question.<sup>2</sup> ' However, the VChK never made a serious dent on taxes and was allowed to lapse. This has been interpreted as weak political will; but the insights here suggest that the VChK was a non-starter because of a tacit political bargain: the biggest tax delinquents (oil, gas, electricity, railways) head the list of implicit subsidy providers.

The impact of the preceding macro policy stance on enterprises was huge. The real exchange rate had already appreciated by some 650 percent between the start of transition in 1992 and early 1994 ("first phase"). It then depreciated by about 15 percent till mid-1995, when coinciding with the start of stabilization symbolized by the fixing of the exchange rate through the corridor, it began appreciating again, by some 60 percent between mid-1995 and July 1997, when it peaked ("second phase"). While the first phase of real appreciation (1992-94) can be rationalized as equilibrium price-level adjustment (planning era prices and wages adjusting to world levels), the second phase coinciding with the 1995-97 disinflation hurt enterprises substantially. This can be inferred from the tremendous re-bound enterprises have been enjoying in the wake of the real devaluation associated with the meltdown: by end-1998, the real exchange rate had returned to its mid-1995 level, and enterprise finances and performance have substantially improved.<sup>22</sup> 20 The column headings in Table xx are acronyms of various offset instruments. The table has a remarkable feature: most of the off-diagonal elements are zero, because as soon as one type of offset was scrapped under pressure from the IFIs, a new one was developed, leading to a persistent pattern of mutation! 21 A Fiscal Action Plan, also known as the Kudrin-Fischer plan, was formulated in November 1997 to bring the deficit under control. For the first time, expenditure control under the auspices of the federal treasury received serious attention, while the federal government committed to eliminating offsets by January 1, 1998. 22 Ahrend (1999) contains an interesting analysis of the incentive effects of the real exchange rate. See also OECD (2000). It is also likely that with oil, gas and other commodity exports enabling a surplus on the trade balance, a much larger real