Paying Debt Won't Solve Crisis

If some rich tycoon were to leave in his will tomorrow the 50 trillion rubles ($8.7 billion) necessary to pay all of Russia's back wages, it would not solve the country's arrears problem.

The mounting backlog of wages is just one twist in a giant Gordian knot of tax, enterprise and other debts that is both paralyzing the Russian economy and feeding social content, evidenced in Thursday's nationwide strike by 1.2 million workers.

Just as a potpourri of factors has been behind the growth of the wage debt -- which has more than doubled since last summer -- so, too, will a broad combination of steps be needed to reduce it. Most of those solutions, however, are the longer-term structural reforms, such as enterprise bankruptcy, that the newly appointed Cabinet is only beginning to tackle.

Moreover, federal and regional authorities account for only about 20 percent of total wage arrears, or 10 trillion rubles, with the federal share estimated at less than half that amount.

Enterprises owe most of the bills. That means the government's frantic effort now to send money to coal miners in the Kuzbass and teachers in the provinces is only a partial, stopgap measure.

"You could get rid of all wage arrears tomorrow, but in a year's time you would have another buildup," said Roland Nash, an economist at Renaissance Capital investment bank. "You wouldn't be addressing the underlying problem."

In fact, the federal government did make a concerted and partially successful effort to pay off its wage debts during last spring's presidential campaign. But afterward, the total spiraled up again, driven by tight monetary policy, falling production, unbudgeted wage and pension increases approved by parliament, plummeting tax revenue and a law that had allowed companies to pay their workers ahead of taxes.

Sky-high yields on government securities were another problem, tempting regional officials or enterprise managers to speculate on the T-bill market instead of paying workers. With yields now falling and the government pledging tighter control over authorized funds, that practice should be curbed.

Ministers have pledged to pay off their debts by the end of the year, a commitment likely to be backed up in the 1997 economic program now being finalized with the International Monetary Fund. But they also will be responsible for implementing the structural reforms that allow -- or force -- enterprises to pay their own bills.

Underlying all of this is a tangled web of nonpayments among governments, enterprises and workers.

The federal budget is short of tax revenue because companies don't pay their bills, which in turn renders the government unable to pay its suppliers.

The trickle-down continues as suppliers delay or renege on payments to other businesses or their own workers, and increasingly these firms are forced to rely on barter, in goods or in tax exemptions.

"They've pushed tax arrears as far as they can go; they've pushed inter-enterprise arrears as far as they can go. So now it's wage arrears," one Western economist said.

Even when bills are settled, individual workers are last on the totem pole.

"It's just politically not necessary for the management to pay people," said Peter Ekman, professor of finance at the American Institute of Business and Economics in Moscow. "You have to make it politically necessary."

If that is to happen, it will come through the bankruptcy process -- threatening irresponsible managers with the sack if they don't pay their bills, both taxes and wages. Expanded use of bankruptcy, which the new Cabinet has promised, would separate enterprises responsible for wage arrears into two categories: those that, if pressed, could pay their workers, and those that could not.

Another key reform would limit the exorbitant prices so-called natural monopolies in the electricity, rail and gas sectors charge industrial users, depriving them of cash that otherwise could go toward taxes or salaries.

Also vital is tax reform that eases the payments burden on enterprises and eliminates special exemptions. Both efforts are just getting under way, and economists say little effect is likely before next year.

The practice of workers going without wages would hardly be tolerated in most other societies, Ekman said, adding that many employees have "only themselves to blame" for staying on the payroll at insolvent enterprises.

But the alternative, in many instances, is either unemployment or moving to a new city. Ultimately, economic growth and increased labor mobility will be needed if Russian workers are to enjoy regular paychecks.