nd bonds in order to attract the necessary capital. As a result, the borrowing added a new and heavy debt service burden to the Russian budget. Debt service expenditures have accounted for more than 30% of total Russian expenditures. In 1997 and the beginning of 1998, Russian treasury bill rates were averaging more than 25% per annum. Adjusting for inflation would make the real interest rate around 10%. During the late part of May and beginning of June 1998, the Russian government had to boost interest rates on bonds and bills even higher. Notably, most Russian domestic debt was short-term with an average maturity of around 11 months. That meant the debt had to be constantly rolled over, making the Russian government highly vulnerable to short-term fluctuations of capital markets. About 1/3 of the debt is held by foreign investors. The government also has not been able to rein in subsidies to agriculture, the residents of the far northern regions, and the oil and gas industries. It also has not adequately dealt with social payments to the aged, disabled, and others who require a financial safety net. The increasing burden of debt service made it difficult, if not impossible to address other budgetary priorities. Payments to workers, soldiers, pensioners, and contractors were deferred, building up arrears. Now Russia has not been able to pay banks and other investors who hold the government debt, which has created the current crisis. In sum, the Russian government survived financially, until recently, by accruing ever growing debt and government nonpayment of fiscal obligations to workers, soldiers, and others. These practices masked the weaknesses in the government's ability to rein in subsidies and raise revenues. It managed to continue as long as investors were willing to renew short-term debt. But the Asian financial problems and other factors created uncertainty in emerging capital markets on the part of investors, and slumping oil ...
