e failed August 1991 coup. At that time, Boris Yeltsin and the Russian parliament worked together to eliminate the remaining centralized Soviet power, install the first democratically elected president of Russia and launch economic reforms. During the first months of 1992, one did not hear of reactionary forces in the Russian parliament. 6. By April 1992, the Russian government, headed at the time by Prime Minister Egor Gaidar, came under increasing pressure to abandon the economic stabilization targets agreed to through the International Monetary Fund. One key component of those targets was a balanced federal budget by the first quarter of 1992. This was initially achieved through drastic cuts in price and enterprise subsidies, military procurement and central investments. Following the implementation of these measures, the budget recorded a surplus equivalent to 4 per cent of GNP for the first quarter. However, under heavy parliamentary and labour pressure, the government weakened its tough fiscal stance. The original budget surplus was compromised through increased government expenditure in public sector wage increases, new social spending programmes, higher than planned grain procurement prices and increased enterprise subsidies. Consequently, the federal budget recorded a deficit of 5 per cent of GNP for the first half of 1992. By the end of 1992, many placed the budget deficit at 15 per cent of GNP, and if the budget recently passed by parliament goes into effect, the deficit would rise to 25 per cent. 7. No compromise was reached during the meeting of the Congress of People's Deputies in December 1992. The sole development was the instalment of a new Prime Minister, Mr. Victor Chernomyrdin. The power struggle has since intensified and has assumed a lasting character due to an inadequate constitutional system inherited from the Soviet era. The 1978 Brezhnev-era constitution poorly delineated the separation of powers and is thus open to varying interpretations as to with whom the ultimate govemployment of people in these areas must be taken into account along with any defence conversion programme. A. Economic Priorities 1. Monetary Policy 17. The history of monetary policy over the past year has shown much of the direction and lack of co-ordination that is present today. The effectiveness of the government's monetary policy during 1992 was constrained by a number of factors. First, the failure of the former Soviet republics to agree on a co-ordinated monetary policy. Second, several integral financial reforms and institutions were either in their infancy or entirely non-existent. Nominal interest rates remained high, although lower than the rate of inflation, and monetary policy relied primarily on credit expansion. A rapidly expanding banking sector continued to work with little government oversight or protection, contributing to a large percentage of non-performing loans and poor co-ordination. Government-inspired growth in the money supply and credit were the only domestic sources of financing for the massive budget deficit. Lastly, the Central Bank of Russia continued to implement liberal monetary policies without regard to government reform programmes designed to meet International Monetary Fund requirements. 18. These policies have created a false economic atmosphere as trade was conducted through credit rather than hard currency. Quite simply, an enterprise currently bills the recipient's bank which in turn transfers the transaction to a creditor. These liberal credit policies have produced only paper profits and losses. These practices are still ever-present today, albeit with some improvements. 19. In an effort to ensure the disbursement of $1.5 billion from the International Monetary Fund to help finance the budget deficit, the Central Bank employed some much needed reforms to decrease inflation and increase the value of the rouble. During the first half of 1993, the Central Bank more than doubled interest rates to a current level of 170 per cent and also slowed the infusion of roubles into the economy. The inflation levels are now averaging approximately 20 per cent a month. While extremely high, they are down from levels of 35 per cent at the beginning of the year. The rouble has appreciated against the dollar from a high of 1,500 to approximately 1,000. Then came the decisions by the Congress of People's Deputies and the Central Bank in July. The announcement by the Central Bank of the immediate withdrawal of all pre-1993 roubles caused widespread panic in Russia and universal condemnation from the West. While inflation and the rouble have remained at the levels prior to this announcement, the decision will most likely have a long-lasting impact on international lenders who had wavering faith in the ability of Russia to implement a responsible monetary policy. 20. The Central Bank provided a short statement of the reasons for this action. They stated that they wished to gain greater control of the injection of roubles into the economy coming from the other republics and also to confiscate counterfeit currency and hamper the underground economy. In fact, this policy had just the reverse effect. Amidst the panic, the republics began to flood Russia with their old roubles in an effort to save some of their investments and savings. Illegal operations, which the Central Bank cited as one of its targets, were untouched due to its prominent use of hard currency. The estimated amount of old roubles in usage prior to the withdrawal was estimated at 12 per cent of the total money supply. In fact, the Russian citizens were the primary "beneficiaries" of this policy as they were forced to stand in long lines at banks and see much of their money forced into low-interest savings accounts as part of the Central Bank's decision. President Yeltsin subsequently modified the Soviet-era currency withdrawal provisions but these changes were widely considered too little and too late. 21. Other significant ramifications have resulted, or may result, due to this decision. The Central where former weapons engineers can work on civilian projects. 70. However, as explained by Mr. Johan ter Haar, an administrator of the TACIS programme, the main difficulty in identifying projects is that all of the problems in creating market-based economies are interconnected. Food production cannot be increased, for example, without proper prices. But freeing prices is impossible without functioning markets, which require shops, distribution, transport systems and a spare parts industry. "You have to identify one link in the chain and tackle it. Then you try to make a package", he explained.(8) To increase the effectiveness of its programmes, the EC is increasing its co-operation with the World Bank and the EBRD. However, many believe that technical assistance should be more centred on grass-roots assistance, thereby bypassing the bureaucracy and political turmoil in Moscow. This should be advanced both in the public and private sectors. 71. In general, the overwhelming fear of future aid to Russia