The speeds with which political appointments are made and unmade in Russia make it difficult to gauge the importance of a particular politician or economist at any given time. One person, however, has remained in the public spotlight despite the fact that he holds no high office. Another proof of his importance is that there is still a puppet modelled after him on the very popular political-satirical TV show "Puppets."

But Alksandr Livshits is no political puppet. As one of the country's leading economists, Livshits is well known and respected throughout Russia. He has done the rounds of political life as minister of finance and then deputy head of the presidential administration for the economy. He was the key economic adviser to President Yeltsin throughout the years of reform. As finance minister, Livshits launched the most successful Russian eurobond issue to date. Livshits considers that his proudest moment and a carefully framed certificate praising his work on the issue now follows him from office to office. These days, it all seems like long ago glories. Now, he is the president of the Economic Policy foundation. He also hosts his own TV show "Ask Livshits" in which hundreds people send in their questions on finance, economy and taxes for him to answer.

Livshits is a market economist and is respected in the West. In 1998, when Anatolii Chubais was holding talks with the IMF as the official Russian negotiator with the international financial organisations, Livshits was securing support behind the scenes. In just over a month, he spent dozens of hours on planes, hopping from country to country and holding endless meetings. That feat landed him in the hospital with heart trouble; the stress was too much to bear.

He admits that now he has learned to take a more relaxed view of events. But closer observation reveals that, if the number of grey hairs is anything to go by, events since August 17 preoccupy him more than ever. Right up until the end (August 17), Livshits kept insisting that devaluation could be avoided, and he handed in his resignation immediately after the collapse. A week later, after Sergei Kirienko was dismissed as prime minister, Livshit's name began circulating as a possible contender for a government post. Now, with talk of reshuffles in the air, his name is cropping up again as a potential finance minister. Livshits does not deny these rumours, but makes it quite clear that he will join the government only if he is given real authority. His willingness to cooperate even with the present, pro-communist government is explained by the fact that he prefers to be doing something rather than simply fussing round, trying to keep a spotless political image.

Livshits stands by his democratic convictions, but at the same time, he has never been an uncompromising liberal. He says it is because "life is far more complicated than any theory would have it." The lively and ironic Livshits is always ready to illustrate economic issues with expressive allegories and examples taken from everyday life.

The Russia Journal talked to him about future economic scenarios and the impact of the Primakov government and its policies.

RJ: Can you tell us what the likely turn of events will be in Russia?

AL: Economic or political events?

RJ: Let's begin with the economy.

AL: I think there are four likely scenarios. I've tried to calculate the likelihood of each one happening. The first possibility is liberalism. New people would come into the government, the budget would be rejected as no good, a new budget would be drawn up, there would be a clamp down on state spending and so on. There's absolutely no chance of this actually taking place. Then there's what I call a return to the past: very high inflation, increased state regulation. I give it a 10 percent chance of happening. What's most likely is what we have now, a conservative approach, stability, an attempt to maintain the status quo. Finally, there's the possibility of a change in tack to the right, I'd give it a 20 percent likelihood.

RJ: This return to the past scenario, how would it happen?

AL: There'd be pressure on the government from big taxpayers, agreements would be signed, the government would keep its social promises, come what may. It would print money to do so.

RJ: And the danger?

AL: Very high inflation. All everyone really wants is to win the elections. You can have high inflation, pay people a pittance, but pay it on time, or you can have lower inflation and not pay people at all, but that's no way to win an election. Remember 1995? I don't recall any strikes then.

RJ: So inflation rises and people get peanuts.

AL: Yes, but it keeps the miners quiet. Prices go up, but we keep forgetting about the grey economy.

RJ: But inflation can't go on forever; you have to check it at some point.

AL: If inflation spirals out of control, then there'll only be tough measures left, hard currency sales only through bank accounts, chasing everyone into the banks they're so wary of. People can put up with a lot, but they won't give up their dollars.

RJ: So the return to the past is unlikely because of the potential social unrest it would cause?

AL: Yes, the dollar has become a form of insurance from the state. I reckon even the old grannies have a few greenbacks stashed away.

RJ: What about this tack to the right, would Masliukov be discreetly removed, and Primakov agree to move a little in that direction?

AL: It could be that way, though the present Cabinet could also lean to the right.

RJ: Would their convictions allow them?

AL: The IMF would convince them. The IMF could subject us to a rather humiliating form of monitoring. Like a kindergarten teacher. 'Naughty boy, don't do that.'

RJ: And if the government can't come to an agreement with the IMF, don't you think Masliukov could just turn around and say, 'Well, we're not going to pay a thing'?

AL: That would be a blow not just for the Communists, but for the whole country. I think many of the Communists need a lecture on what would happen.

RJ: In three points, what would that lecture be?

AL: First, no money from the IMF or the Japanese government. And the budget was drawn up with that money in mind. Second, people are waiting to see what decision the IMF comes to with regards to our default. Default, that's an awful word, that's seizure of any assets, Aeroflot's planes, government-owned real estate abroad, our assets will be up for auction. The worst is bank accounts, the Vnesheconombank accounts, the Central Bank's reserves.

RJ: Held abroad?

AL: Yes. And even any communist understands what a disaster all that would be, and the government knows.

RJ: Will there be an agreement with the IMF?

AL: Yes, there will.

RJ: And when will the money arrive?

AL: Towards May.

RJ: You don't agree with those who say that the money will come in June or July?

AL: We need the money in May, there're a lot of payments due then. Maybe we'll get a deferral, but we would need to make some kind of serious commitment.

RJ: What if an agreement is reached and then economic indicators tumble: Will the IMF stop giving us money?

AL: Perhaps, but we still need an agreement to get money from the World Bank and the Japanese. Reaching an agreement with the Paris and London clubs will be more difficult. Restructuring is a serious issue for them, the money is already foreseen in their budgets, they're not going to just let it go. The World Bank could give us something though, just to spite the IMF. The Paris Club represents individual countries, though; the German chancellor would end up having to explain to his people why he's decided to forgive the Russians their debt. I don't think we can expect any restructuring before the presidential elections. It's an illusion to think that the IMF will say 'yes,' and everything will be roses.

RJ: Could the outcome of the presidential elections influence talks with the Paris club?

AL: All they want is for the situation to be under control, they'll get used to almost anyone. In the West, they like to say, 'We'll adapt to anyone, you just tell us what you want, what you're going to do, and most importantly, how you're going to do it. If you have the resources, we'll work with you; if someone else has the resources, we'll work with them.

RJ: So we can't hope to have part of our debt written off?

AL: Sooner or later, something will be written off; the economy simply won't survive otherwise. The current situation is set to stay for some time. There's not going to be any boom over the next couple of years.

RJ: This year, we're asking for loans to service our debt. What about next year, the same thing?

AL: That's what I keep saying. What we've agreed on now should be seen as a first stage. We need some kind of long-term programme with the IMF, so as not to have any headaches, there'll be enough of those with the presidential elections.

RJ: But we're going to have to pay out of our own pockets each year.

AL: Yes, we are servicing our debt at this moment.

RJ: With the Central Bank's reserves.

AL: Unfortunately yes. That also points to Primakov's skill. When I was finance minister, it never occurred to me to ask the Central Bank to service our foreign debt. The ministry of finance has to pay. I can buy hard currency from the Central Bank on the currency market. But now, it's written into the budget that Vnesheconombank will be financing the foreign debt in the second quarter, through the Central Bank. The fact that the Central Bank agreed to this proves what strong ties Primakov has established.

RJ: And the situation with the budget?

AL: The budget is a separate issue. I've never came across such a budget, I mean in terms of opportunities for ... [makes a gesture as if counting money].

RJ: Siphoning off budget money?

AL: I think it's essentially linked to elections ...

RJ: Will the Primakov government restore ...

AL: Socialism? No. What Primakov has done is to change the whole political set up since August 17. Already back in the summer I was saying that we'd be living in a different country. Well, we are living in a different country, everything has changed.

RJ: Could you be more clear?

AL: Coming back to my scenarios, the catastrophe scenario is unlikely.

RJ: By catastrophe you mean the dictatorship of the proletariat?

AL: No, that's a return to the past and it's unlikely. What's more likely is the 'what will be will be' scenario. Wait for a new president in 2000, see where he takes us, left or right.

RJ: 'What will be will be' is all very well, but April is just round the corner ...

AL: Well yes, and we can expect inflation of maybe 7 or 8 percent, that's bad, but it's not 20 or 30 percent; it's not a catastrophe. The changes on the political scene, that's interesting. Primakov is building up a promising political machine, he's doing the right thing. There was always this couple - the president and the government. Primakov has built this triangle, he's added the Duma and the Central Bank, and it's the government that binds them all together. Everyone talks about how Primakov gets on with the Duma, and everyone forgets about his ties with the Central Bank. Over the last four months of 1998, the Central Bank poured 8 billion roubles into the budget each month. That's a lot of money! The corresponding law was only adopted at the end of December, though. Just imagine what kind of mutual understanding you need to persuade cautious central bankers to do that kind of thing without even having a law to back it up. It's not certain that Dubinin and Kirienko, say, or Chernomyrdin, would have been able to work that way. I know Dubinin, if there's a law, he'll cough up, if there's no law, you won't get a kopeck from him.

Then there's the budget, I'm not talking about the quality, but to get it through the Duma in the first reading is unheard of and Primakov did it. This is a whole new system, it has its contradictions, but it works and it has brought political stability. It has also brought a bad budget, high inflation, and it has strengthened the government's role. That's a 50:50 success rate; it's better than zero anyway. What's most important is the eventual cost of all this. I predicted that by February or March, this political machine would go into a spin, essentially because of taxes. That's what is happening now, with the rise in income tax rates and so on. I think we should take that triangle that has been formed and give it some kind of constitutional framework that would enable us to modify it, correct it when necessary.

RJ: Bringing in new people?

AL: Yes. This triangle could fall apart. Primakov's worst enemy isn't the economy, it's elections. Economic mistakes can always be blamed on someone else, but there's no shared responsibility in elections.

RJ: Do you think Primakov will survive the elections?

AL: I don't know. The best tactic is to have someone like Berezovskii in reserve, a hostile element that pushes the three corners of the triangle closer together.

RJ: Why is it that taxes have become such a problem?

AL: Because where there's taxes, there's tax breaks, lobbies, elections. You give someone a tax break and he'll be eternally grateful, he'll vote for you. The thing is that no one reads the budget. They should. The Duma wrote an item into it according to which technical credits given to CIS countries in the early 90s are now considered part of Russia's domestic debt. The government owes the Central Bank that money, and now it's going to have to come from the budget, from our pockets, as taxes. Where could that item have come from?

RJ: You could find out?

AL: It's no secret, there're over 30 such items in the budget. Item 108 fills two pages and divides up additional budget income, even though there is no budget income. What kind of inflation are they expecting? Not 30 percent. The very existence of that item is just as inflationary as printing money. It's obvious that if inflation is high, there'll be money to spare, and so they rushed to divide up the spoils ahead of time.

RJ: So, for all those mentioned under that item, the higher the inflation rate, the better?

AL: That's exactly it. It's maybe just as well that journalists don't read the budget, there'd be a real uproar if all of this became public.

RJ: But some things have become public.

AL: Hardly anything. Look at item 106, it gives the state the right to grant credits to private sector commercial organisations, just what you need before elections.

RJ: Whose election campaign is in mind here?

AL: There's plenty for everyone, left and right. The government got through January all right, they stopped taking money from the Central Bank. Inflation came down. In autumn, people were predicting up to 400 percent, I knew that wouldn't happen. January and February prove that with this political consensus and the status quo, it is possible to follow reasonable policies.

RJ: What kind of incentive do the Communists have to support the government?

AL: They'd rather have Primakov than some die-hard liberal.

RJ: But they wouldn't let a liberal come to power. What do you think will happen if Yeltsin does decide to change prime ministers?

AL: It would be a big mistake to fire Primakov.

RJ: But still, what would happen?

AL: Who knows, the government's job at the moment is to keep the country stable until the elections and then hand it over to someone else.

RJ: What if you're wrong and Primakov's government is going to bring the Communists to power after all?

AL: I don't believe that.

RJ: But just suppose, wouldn't it be worth getting rid of Primakov then, so as to avoid a return of the Communists?

AL: I can't discuss what I don't think will happen.

RJ: You're sure Primakov will stay?

AL: Absolutely.

RJ: What if the communists try to provoke a government crisis and early elections; they say they're ready, after all.

AL: The economy would have to nosedive for that to happen. Only then would they sacrifice their relations with the government, so that people wouldn't accuse them of being party to the mistakes made. It's good to be friends with the government just before an election, they're the ones with the money.

RJ: On the way here, we saw that the rouble has just dropped against the dollar.

AL: That's no good; that's the result of the budget getting fresh money.

RJ: Maybe it's the market reacting to political instability. A lot of people are saying now that the situation is reminiscent of 1993, especially after the Federation Council's decision on Skuratov.

AL: No, it's not the same. Inflation was predicted for March, and here it is.

The Central Bank coughed up 7 billion roubles.

RJ: What can the Central Bank do to maintain the exchange rate? Require sales of all hard currency earnings?

AL: That won't achieve anything. It's like with taxes, people will just try to get around it. With taxes things are even worse. There's high inflation, but where's the money? It's all gone into separate agreements with Gazprom and the oil companies.

RJ: VAT is the tax with the highest collection rate, obviously the IMF is right in saying that now is no time to decrease it.

AL: Of course, we didn't need the IMF to tell us that. And our penchant for mutual debt offsets, the IMF doesn't like that either. We also used that system when I was finance minister, but gritting our teeth, only as a last resort measure. Now it's being presented as something normal.

RJ: Coming back to taxes, where's all the money going? People aren't just keeping their savings under their mattresses after all, they're spending them. Some regions have already introduced the 5 percent sales tax; so where's the money?

AL: There's this idea now of paying taxes proportional to what you yourself are being paid, it's the natural monopolies' dream. I produce electricity, 20 percent of my customers pay me money, some of them pay me in kind, the rest don't pay at all. So I say I'll pay 20 percent of my taxes in money, and the rest in electricity. That's our present system. It's not a good sign when people start praising the tax bosses, not in this country. Another thing I don't understand, as a kind of New Year's present, like in old days, the government suddenly showered good news on the country. Higher wages for the army and budget supported workers, indexing of pensions. One bit of good news would have been enough, why a deluge? People aren't going to forget that indexing begins in April, and what's going to happen when April comes and the printing presses get rolling? The money's been promised, and where is it going to come from with taxes as they are?

RJ: If there's no way forward for the economy, then the only thing is to go into reverse?

AL: No, think of a train that's stopped. You look out the window and see '1995.' At the moment, we're as if in 1995, but that doesn't mean that next year will be like 1996. Annual inflation in 1996 was 22 percent; I don't think we're looking at that.

RJ: And how long will we be living in 1995?

AL: Until the presidential elections next year.

RJ: Won't the parliamentary elections have an impact?

AL: The danger is always just following elections when everyone wants to make their mark. Maybe that's good, maybe it's a shame to be wasting time; but then, maybe Primakov is right with his conservative approach. The two big dangers are inflation and the foreign debt.

RJ: Do you see Primakov as a kind of kamikaze, taking all this risk on himself?

AL: There's two kinds of kamikaze, the ones that for better or for worse bring about change, and the ones whose job it is to take the country through to elections and then hand over power. Primakov is the second type, he's not going to implement liberal reforms, but he's shouldering the responsibility for the economy.

RJ: And when will it be possible to carry out liberal reforms?

AL: Not before the elections, and then liberalism in Russia is associated with a bunch of 'crooks and swindlers' at the top. That image will take time to fade. Also, liberalism in Russia depended on Yeltsin's strength of will, but that has changed. And then there's the social factor, people need a minimum of support, that's why it wasn't possible to implement liberal policies last autumn. Liberalism in Russia is like a shop that's closed for stocktaking, it's not closed for good.

RJ: And when will it open again?

AL: In 2004. Or if there turns out to be some secret, 'underground' liberal lurking amongst our prominent politicians. One who professes to hate monetarists, and then comes to power and lets his true colours show. But that won't happen. What we've got now, this cautious line without real reform, we can expect it for another five years.