GORBACHEV TRIES TO SALVAGE SOVIET ECONOMY

Soviet President Mikhail Gorbachev late last month moved boldly to prop up the U.S.S.R.'s ailing petroleum industry during the near term by using a carrot and stick approach. Meantime, he is seeking a huge infusion of western money to improve long term energy production prospects. A Kremlin decree signed by Gorbachev said drastic action is required at once to prevent further deterioration of conditions in basic branches of the national economy.

June 3, 1991

4 min read

Soviet President Mikhail Gorbachev late last month moved boldly to prop up the U.S.S.R.'s ailing petroleum industry during the near term by using a carrot and stick approach.

Meantime, he is seeking a huge infusion of western money to improve long term energy production prospects.

A Kremlin decree signed by Gorbachev said drastic action is required at once to prevent further deterioration of conditions in basic branches of the national economy.

The Soviet president declared that the industrial sectors requiring the most urgent attention are oil, gas, coal, electricity, refining, and petrochemicals, along with metallurgy and rail transportation.

Shortly after calling for a strike ban in those critical industries, Gorbachev said the Soviet Union might need as much as $100 billion worth of western assistance to restore financial, economic, and political stability.

A group of Soviet economists regarded favorably some aspects of a proposal by Harvard University professors that the seven largest western industrialized nations, including the U.S., pump $15-30 billion/year for several years into the U.S.S.R. to strengthen "perestroika."

At the same time Gorbachev was attempting to ease the U.S.S.R.'s economic crisis, the U.S. Central Intelligence Agency and the Defense Intelligence Agency predicted the Soviet Union's 1991 gross national product probably would see an even greater decline than in 1990, and inflation likely will increase faster than last year.

In a report to the joint economic committee of Congress, CIA and DIA said if internal conflicts between Moscow and the 15 constituent Soviet republics don't end soon, the U.S.S.R.'s GNP probably will decline 10-15% during 1991, and inflation could exceed 100%.

ECONOMY "CRITICAL"

Gorbachev prefaced his decree ordering immediate economic reforms with a warning that the U.S.S.R.'s economy is in "a critical situation." He said production is still failing and national income has dropped by 10% this year.

"The severing of normal economic relations presents a real threat that thousands of enterprises will shut down," he said. "Millions of people could become unemployed."

In ordering that special priority be given to energy production industries, along with refining, petrochemicals, metallurgy, and railroad transportation, Gorbachev said the entire national economy could collapse if their operations were disrupted. His decree demanded that workers in those sectors meet government production quotas, fulfill their contracts with other enterprises, and strictly observe labor discipline.

Basic industry enterprises were given the right to sell as much as 10% of their production on domestic or foreign markets at prices agreed to by the producer and buyer rather than at fixed prices set by Moscow for the remaining 90%.

The right to sell 10% of their production under open market conditions would enable the energy, refining, and petrochemical industries to obtain desperately needed hard currency that could be used to buy foreign equipment or scarce consumer goods.

THE CARROT

To encourage immediate implementation by the oil, gas, petrochemical, refining, and metallurgical industries, the Gorbachev decree provides incentives for enterprises to increase production. As an "emergency measure" effective during May-December 1991, each 1% hike in daily production during the period compared with January-April daily production would be rewarded with a 5% increase in the enterprises' "consumption fund." That's money set aside to buy consumer goods, services, and social amenities for employees.

Unspecified but "substantial" wage increases also will be granted to workers in the power, coal, and transportation industries for improved labor productivity and for fulfilling Moscow's quotas.

Local governments were told to assist the designated basic industries in every way possible and not to interfere unnecessarily in operation of enterprises in those sectors of the economy. Improved arbitration procedures were set up to settle disputes between enterprises and between enterprises and government entities.

Special regulations regarding resolution of labor disputes and banning work stoppages were distributed to all enterprises in the oil, gas, coal, refining, petrochemical, and metallurgical industries. Workers hampering production or "violating public order" in those sectors will be subject to administrative or criminal punishment under the new rules.

Moscow hopes to achieve positive results in the petroleum and other designated basic industries within the next several months. In particular, it will try to use the decree to stop the plunge in oil and coal production, improve the growth rate in gas and electrical power supply, and ensure more efficient operation of refineries and petrochemical plants, where equipment breakdowns are frequent and delivery of materials is unreliable.