sector and lax tax enforcement.16 The energy monopolies in turn passed the related costs on to the fiscal accounts, becoming the largest tax delinquents as well as the biggest participants in tax offsets. This led to the chronic shortfall in cash revenues witnessed over the 1995 - mid 1998 stabilization, estimated at 2.5 percent of GDP per year. The government had to borrow more, pushing up r. This caused liquidity problems for enterprises that pushed them further towards NCS, while increasing the need for implicit subsidies and stifling growth. This intensified the chronic shortfall in revenues, thereby making even pd a positive function of r, adding to the explosiveness of d, which reached default levels, precipitating a macroeconomic collapse."<sup>7</sup>

# Macroeconomic policy and Nonpayments

The government attempted to stabilize by fixing the exchange rate, which was done in mid1995, and controlling credit; but fiscal deficits were not commensurately reduced, so net new borrowing was large at the federal government level, as Table 2 shows. This table captures the single most striking feature of Russia's temporary stabilization, namely, while fiscal deficits strayed far from their targets, the original inflation targets negotiated with the IMF were largely adhered to.<sup>18</sup> Russia got embroiled in unpleasant monetarist arithmetic, replacing money printing with a public debt time-bomb.1<sup>9</sup> Table 2: Macroeconomic Performance Over 1995-1998

|Ye;arW|qp12-Mnt Inai|on-(96|'!i;;<br>ai deililtG)|<br>i% ;'<br>|**1ncas**- ,;,-In.;X;<br>Pli Dbt00i0000<br> <br>|
|---|---|---|---|---|---|
|_<br>_____<br>___|__<br>__<br>__<br>__<br>___<br>Orliginal Progra<br>Target|Actuat~l<br>___f_C|________________<br>Dorighilp1r*am<br>Tareti|_Afw$11_<br>D__X__S|u e<br>0F0<br>0 0<br>0$ :<br>_A<br>__|
|1995 (SBA)|63|131|6.5|5.6|25|
|1996 (EFF96)|25|25|4.2**bl**|7.9 r|31|
|1997 (EFF96)|9|11|3<sup>.</sup>2<sup>b/</sup>|7.3 c|25|
|1998 (EFF96)|6|84|_2.2_bt|5,9c/d/||

'Deficit of the enlarged government on a commitments basis. "<sup>t</sup> Based on higher nominal GDP projections. dInclusive net change in government arrears. dlExcluding overdue interest on GKO/OFZ. e'Sum of domestic and foreign borrowing. Authors' estimates..

With taxes flagging and inadequate expenditure control, the federal government resorted to arrears and monetary surrogates in addition to borrowing. Various generations of offset instruments were devised to cancel mutual budgetary and tax arrears. These doubled from 10 percent of federal government revenues in 1995 to 20 percent or more in 1996 and 1997, as seen in Table 3. Together with monetary surrogates, offsets accounted for over 20 percent of federal government non-interest

> 16 This argument applies more broadly, e.g., when oil companies are threatened with a cutoff in access to the oil export pipeline unless they continue supplying nonpaying domestic refineries.7 As noted in KPU (2000), the public debt to GDP ratio remained roughly constant over 1995-97 in spite of pd>0 and r>>g, because of large capital gains from real appreciation on the foreign currency component of public debt. However, the dynamics (including the real appreciation) were unsustainable, pushing the public debt / GDP ratio from 49 percent at the end of 1997 to 104 percent by end-1999, following the August 1998 meltdown.

> 18 NB: The comparison is with the **original** program path negotiated in early 1996. Subsequently, both inflation and deficit targets were revised.

> 19 Sargent and Wallace (1981). In retrospect, the desire to achieve single-digit inflation was pursued with all the zeal of a lexicographically ordered policy preference.