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12 April 2000
[Note from David Johnson:
1. APN: Natalya Laydinen, Who thinks logically? (Views of Putin
2. Bloomberg: Russia Must Prove It Has Credible Economic Plan, Investors Say.
3. Smi.ru: Maskhadov Says: Basayev, Udugov and Berezovsky Started
4. APN: [Igor] Chubais offers restitution instead of
5. Cyrille Arnould: Re Ira Straus on Council of Europe (DJRL 4239).
6. Itar-Tass: Russia in Crisis Over Conflict Between Two Energy Giants.
7. Rossiyskaya Gazeta: Vadim Kopin and Vladimir Mashin, Small Business
Will Not Pull Out Economy. (Govt Economic Strategy Change Expected)
8. Stanley Fischer (Acting Managing Director of the IMF): Russian
Economic Policy at the Start of the New Administration. (Speech in Moscow)
9. Interfax: Igor Denisov and Vitaly Davydov, START II: LONG AWAITED
April 11, 2000
Who thinks logically?
Independent Research Center ROMIR
(Vasily Ivanovich Chapaev is a hero of the 1918-1920 Civilian War in Russia.
Furmanov - his commissar /Communist representative in the army/. Petka -
Chapaev`s adjutant. There are a lot of jokes existed in Russia in which these
characters are played upon.)
Chapaev meets Furmanov.
The latter has a book titled «Logic» in his hands.
- Furmanov, what does «logic» mean?
- Look, Vasiliy Ivanovich. Do you like shrimps?
- Yes, I do.
- It means you like beer as well.
- Right, I do.
- And this means you like also vodka.
- It`s true.
- It comes of it you have a mistress.
- Correct. I have one. Such a thing this logic is!
- Later Chapaev meets Petka.
- Petka, do you like shrimps?
- No, Vasily Ivanovich, I don`t.
- You don`t like shrimps?!
- You don`t like shrimps?!!
- No. I don`t.
- Well, then you are justâ€¦an impotent!!!
Two contemporaries act now on the Russian political stage: 48-year-old
Vladimir Putin and 48-year-old Grigory Yavlinsky. But the Russians,
particularly, ordinary citizens, so-called non-expert audience, whose opinion
sociologists survey by a focus-group method, always try to underline Putin`s
youth despite his maturity, and at the same time they call Yavlinsky, who is
old by no means, a «long-liver» though a political one.
On the eve of the 1996 presidential election, our colleagues-sociologists
revealed more surprising things. Some of the voters, focus-group
participants, declared that Gennady Zyuganov, 51 at that time, was older than
Boris Yeltsin, 65. What was all that about?
Evidently, in the modern world, millions of voters take politicians not as
real persons but just through the prism of their virtual images existed in
the informational space. Social psychology calls it a «phenomenon of remote
perception». The reason is quite clear: a president of the country, a
governor or a deputy are not a village elder whom his neighbours can see
every day and judge him by his real affairs.
What is the difference between a politician`s image and the politician
himself? In scientific terms, specificity of the image consists in imputing,
to the object, - through the method of associatiom - additional values
(social, psychological, aesthetic, etc.) which are not necessary to have
anything in common with the object`s real characteristics but have social
meaning for the percipient.
Your imagination plays an extraordinary part in this situation. That is, the
less it is known about the figure the more unknown and non-existent qualities
will be possible attributed to him in case of positive perception. If the
image has been already of negative shade it seems more likely to be supplied
by additional negative characteristics.
Examine a number of examples. In this February, ROMIR conducted a series of
group discussions in 10 Russia`s cities to survey certain presidential
candidates` images. The Yabloko leader`s economic program, in particular, was
discussed with ordinary voters -Yavkinsky`s allies. It was obvious nobody had
read the program. However Yavlinsky`s electorate was positive to declare that
this unread program was «well-founded», and «industrial upsurge», «tax cut»,
and «reforms in social sphere» had been envisaged in it. One should remember
a popular, in former times, phrase: «I`ve never read the Pasternak`s novel
but I wanted to say»
According to other candidates` allies who also had never read the Yavlinsky`s
program (and were not going to), it was «pro-western», and aimed to
«transform Russia into a raw material`s adjunct to western countries.»
Neither will ever read this document because they have had their opinion
A similar effect was described by Herbert Wells in 1907 and later social
psychologist Thorndike called it «halo`s effect» - boosting one quality,
«colouring» the rest characteristics with it.
Let us discuss Vladimir Putin, the most popular, at present, Russian
politician. His image created by public opinion presents a «resolved, strong
person», «fighter against terrorism and criminality», «defender». These key
descriptions are automatically transferred to other spheres of new
Majority of respondents have no doubts at all that Vladimir Putin not only
knows how to control «those in power» but is also qualified in economics,
social sphere, etc., in one word in all areas without any exception.
But liberal Yavlinsky`s image is a «defeatist» and «weak person» because
liberalism and weakness are very close notions for many Russians. Endless
footages showing Yavlinsky with boxing-gloves are running in vain: no
correction in his image has been observed.
Special quantitative ROMIR`s polls, conducted to examine Putin`s image, in
which respondents were selected to represent a wide cross section of Russian
adult population (N=2000), showed that 56% of respondents called the youth a
dominant characteristic in the politician`s image. Perception of Putin, first
of all, as a young politician was confirmed also by the results of group
discussions. Though his age of 48 is quite enough to provide himself with
Thus, Vladimir Putin is «young», «active», «energetic». And what is more: the
author of immortal words «Waste in the outhouse» (with a pledge to hunt down
Chechen separatists even in their outhouses and mochit`, or «waste» them,
Putin opened the latest war in Chechnya) and of other similar aphorisms is
taken as a «pleasant», «with correct manners», even «intellectual» person.
Special attention should be paid to the way Putin is perceived by female
voters. The focus-group female participants spoke out, in particular, like
that: «We became used to amebiform men but Putin is of another kind», "He
smiles like a strong man.»
These descriptions changed the stunted and low-key Vladimir Putin into a
handsome man; he became tall, with wide shoulders. «I am sure he has a lot of
mistresses,» one of the female respondents said in admiration.
But Putin is not a charming handsome person and not a robust young man for
those who dislike his policy. Other candidates` supporters described him as:
a «black box», «Malevich`s black square», Â«person who keeps himself in
wool», «grey mouse», «fox», and «rodent».
The ordinary voter depicts a politician`s image being guided by his or her
own associations, which are quite simple sometimes. In other words, the voter
«thinks in a logic way».
Russia Must Prove It Has Credible Economic Plan, Investors Say
Moscow, April 11 (Bloomberg)
-- Fifteen multinational companies, including investment bank Goldman
Sachs Group Inc. and gold producer Newmont Mining Corp., appealed to Russia's
government to pursue a credible economic plan that will lure new investment.
The companies met First Deputy Prime Minister Mikhail Kasyanov and other
officials to assess President-Elect Vladimir Putin's attitude toward foreign
investors' concerns. They said they want to see Putin's economic program, due
to be published in May, and evidence he can work with the Duma, the lower
house of parliament, before deciding whether to invest in the country.
``If the world markets see that they can work together, if they believe the
economic plan will work -- you will see a lot of capital begin to come
back,'' said John Kean, president and CEO of NUI Corp., a U.S. company that
owns natural gas utilities. ``Right now the world markets look at Russia and
there is a huge discount they apply towards investments here because of the
Putin, who won election last month, has pledged to protect private property
and investor rights and create conditions for equal competition, though he
has yet to implement any program. He will form his new cabinet only after the
inauguration in June.
Kasyanov, whom Russian media speculate could be the next prime minister, said
the government is aware of what needs to be done to attract investment.
``We plan to take serious action to improve the investment climate,''
Kasyanov said after meeting the group. ``In the first few months after the
new government is formed, we plan to take specific steps, including changing
Many foreign investors in Russia were burnt after the government defaulted on
most of its Treasury debt in 1998 and abandoned its protection of the ruble,
causing the collapse of stock and bond markets. Many banks failed and a
number of companies defaulted on their debts. The ruble's plunge also hurt
foreign companies, because it drove up the price of imports and led Russians
to buy the cheapest goods produced in the country.
Investors said they delayed decisions pending the outcome of the March 26
presidential election and now want to see Putin's actions.
``We are cautiously optimistic,'' said Ian Bremmer, president of Eurasia
Group, set up in 1997 to encourage investment in former Soviet republics and
an organizer of the foreign investors' visit. ``We are facing a historic
window of opportunity.''
The U.S. presidential election later this year also is a factor in investors'
decisions. Investors said they want to see a strong relationship between the
new leadership in both the U.S. and Russia.
Still, the group was generally positive on Putin and what investors view as a
change in approach compared with his predecessor, Boris Yeltsin.
``I am encouraged that they have a plan,'' Kean said. ``I am encouraged the
people I have met understand the economy. It is encouraging for me that they
are talking openly about issues that Russia faces. It is a different
April 11, 2000
Maskhadov Says: Basayev, Udugov and Berezovsky Started the War
In an interview to radio Deutsche Welle, Aslan Maskhadov said the war was
caused by "a conspiracy of the Kremlin's administration, the financial
oligarchy" and, on the Chechen end, Udugov and Basayev. The war was financed
by Russian oligarchs, especially Berezovsky. At the same time, he added,
Udugov has no powers to represent Chechnya; moreover, "Mr. Udugov,
"Kavkaz-center" are people and bodies hostile and oppositional to both the
president and the government+ He [Udugov] may play an agent provocateur,
too". As for militants, practically all field commanders are subordinate to
him and keep in touch, according to Maskhadov. Their losses are about 15
hundred people, whereas their units total ca. 23 thousand people. And "the
number is growing".
Comment: Maskhadov' statement regarding "Kavkaz-Center" which is "hostile to
both the president and the government" sounds exciting. Especially taking
into consideration that for Western reporters, it is the sole source of
information on Chechnya. Even more interesting is his statement that the key
warmonger is Basayev who shoulder to shoulder with field commanders,
including Maskhadov, has fought with the federal forces. By the way,
Berezovsky who is, according to Maskhadov, one of the war's instigators, says
the Chechen president no longer controls the situation, whereas decisions in
reality are made by Udugov and Basayev, which has been proved true by the
recent developments of the conflict. All this looks like Maskhadov's attempt
to dissociate himself from the most odious figures in the hope to pressure
Moscow regarding the negotiations with "Chechnya's legitimate government".
April 11, 2000
Chubais offers restitution instead of privatisation
APN reporter quoted Igor Chubais (chairman of the EES Rossii board Anatoly
Chubais` elder brother) as saying at his news conference that "an idea of
unification" should be a national idea in Russia.
Igor Chubais thinks "a stage of expansion, of imperial policy, lasting for
500 years, has been finished and now when a quantitative growth has been
exhausted, a qualitative growth is essential" with "development" as a key
word: "We should develop our own country but not threaten our neighbours."
Igor Chubais considers restitution (return of property to its former owners,
in the case in question - to tsarist Russian landowners` and entrepreneurs`
descendants) one of the means to develop the country. Chubais said though the
restitution entailed certain costs it was not regarded illegal in any
country. "But privatisation is considered illegal in our country and its
discussion will never end," Chubais said.
According to Chubais, until restitution is done nobody will make investments
in Russia`s economy. Chubais insists that during the last 10 years Russia is
trying to move simultaneously in three directions: Soviet`, Russian` and
western`. "That`s why Nikolai the Second`s remains has been buried with state
honours, and the Lenin`s Mausoleum has been still opened - you can worship
both who had been killed and his killer, and they tried to cancel
Solzhenitsin`s 80-th birthday party, and Andropov`s (a fighter against
dissidents) brass has been restored, and KGB`s jubilee has been celebrated,
and Andrei Pervozvanny`s order has been revived. The result is something like
that: 'German-fascist occupants are welcome'," Igor Chubais.
Subject: Ira Straus on Council of Europe (DJRL 4239)
From: "Cyrille Arnould" <Carnould@ifc.org>
Date: Tue, 11 Apr 2000
Ira Straus is correct to question the significance of Russia's losing its
voting privilege at the Parliamentary Assembly of the Council of Europe
(PACE) and to ask whether Russia should have at all join the Council.
However, using the Council of Europe's requirement that Russia suspends the
application of the death penalty is bizarre.
The CE was created right after WW II as Europe's first attempt to unite
around a set of legal and moral values. Its major achievement has been and
still is today the European Convention for the Protection of Human Rights.
More than one additional well intentioned Convention, that signatory States
could ignore as much as their Raison d'Etat would dictate, the Convention
has been remarkably successful by offering to individuals a recourse
against a member State in case of violation of his/her rights as stipulated
in the Convention and its jurisprudence. Early in the 1980s a protocol
outlawed capital punishment as a violation of Human Rights. Consequently,
European countries are also forbidden to extradite criminals to countries
where they could face the death penalty. Generally, extradition only takes
place after the receiving country provides a formal commitment to not seek
the death penalty for the suspect to be extradited.
This list is of course not a forum to debate death penalty or Europe's
growing disgust toward the USA's never diminishing love of State sponsored
culling. However, arguing that the CE's request that Russia or Ukraine
suspend its application was misplaced is a non-starter. The abolition of
capital punishment is to the Council what free movement of goods, capital
and people is to the European Union. It is as close to the essence of its
membership as can be. At this stage, Chechnya is unlikely to be deemed as
sufficiently unbearable to provide the Council of Ministers of the Council
with the guts to expel Russia, however, were Russia to resume legally
sponsored (as different to politically sponsored) execution, expulsion
would then be certain.
Joining the Council required Duma's approval. Hence arguing that the
suspension of execution was done against the volition of the Russian people
goes against the logic of any parliamentary democracy. Arguing that Russian
jails (which had also been the focus of some CE's less publicised
preoccupation) are hellish enough to justify killing criminals is
putinesque. Putin did justify his little bloody electoral campaign in
Chechnya on the ground that vaporising Chechnya was the only solution
within his means to deal with Chechen criminals. Finally, in six years in
Russia, I never heard my Russian friends complain that the country had been
deprived of a rightful means to deal with criminals. I did hear them
despair that killers could live a free life as long as they were on the
pay-roll of the State, some of its agencies or groups carving out empires
not only with the help of inside dealings but also the help of good old
reliable kalatchnikovs. Mr. Straus, how many contract-killers have been
arrested or tried since 1990?
Russia in Crisis Over Conflict Between Two Energy Giants.
MOSCOW, April 11 (Itar-Tass) -- A new crisis is developing in Russia
triggered by conflicting relatiols between the two energy giants - OAO
Gazprom natural gas monopoly and RAO EES Rossii mammoth Unified energy
As the latter is in deep debt for natural gas supplies, the production of
electric power has been reduced in individual regions of the country.
The repercussions of the "war" between the two giants should not tell on the
energy sector of the Russian Far Eastern, where natuzal gas is supplied to
the power-generating enterprises by a separate entity,
Rosneft-Sakhalinmorneftegaz stock-company, the press service of the
Rosneft-Sakhalinmorneftegaz declared on Tuesday. The company is the operator
of the federal plan for the gasification of the Far East and it runs a joint
company Daltransgaz. But indirectly the leading gas producing enterprise of
Sakhalin has been known to cut its supplies of fuel to the neighbouring
Khabarovsk territory from time to time because of the debts owed to it by the
territorial energy generating facilities. Their outstanding debt now stands
at 210 million roubles.
The leading trouble-maker in East Siberia's Krasnoyarsk territory is OAO
Krasnoyarskenergo which has been rising prices and cutting supplieq of
electricity not only to industrial enterprises but also to schools,
kindergartens and hostels for delays in the settlement of accounts. The
Krasnoyarsk municipal authorities have already threatened Krasnoyarskenergo
with a law suit, and the prosecutor has already issued a directive for a
check of the lawfulness of such actions.
Hundreds of consumerq are left without electricity for two or more hours a
day in European Russia's Krasnodar territory due to the fact that the power
stations in the neighbouring Stavropol territory have cut their supplies of
electricity to Kuban by 200,000 kilowatt a day, according to director-general
of Kubanenergo stock-company Igor Reva. The main suppliers - the
Novocherkassk and evinnomyssk power stations - have had to resort to these
unpopular cuts because of the catastrophic shortages of natural gas supplies.
The Yaroslavl region, 200 km northeast of Moscow is also among the region
where t`e lack of fuel has resulted in dramatic cuts in energy supplies.
Yarenergo chief engineer Viktor Kalivanov said "the provision of electric
power to the region has dwindled by approximately eight percent. The cuts
have not yet affected the homes, but about 60 industrial enterprises in the
city of Yaroslavl and in the Yaroslavl region have already begun to feel the
impact. The black list includes both debtors and those who have no arrears.
For all the efforts design to lower the consumption of electricity in the
region, it has been only reduced by 20 megawatt.
Both gas and electric power supplies have had to be cut by between 15 and 20
percent in northwest Russia's Novgorod region. No electricity is available in
daytime in many districts with the farmers being the worst hit as their
preparations for spring field work are under threat. Attempts are being made
to set things strait in the region. Governor Mikhail Prusak and his deputy
Nikolai Ivankov who is in charge of energy supplies are now in Moscow where
they hope to secure an increase in the gas supplies to the region.
No cuts in the supplies of electricity have been registered lately in West
Siberia's Omsk region, and the regional economy has not been affected,
regimnal energy commission chairman Yery Felimendikov said on Tuesday. He
stressed that the short supplies of natural gas cannot affect the Omsk
regional energy sector because only one of its heat and electricity
generating facilities burns natural gas, while all the others burn coal from
Ekibastuz and Kuznetsk.
In the southern districts of the Arkhangelsk region on the southern shore of
the White sea, the customers have begun to feel the insufficient energy
production in the region. Director of the regional administration's
construction, hoUsing, municipal property and energy department Gennady
Biryukov said with certainty that all the trouble is due to the crisis in
relations between the Unified Energy Systems of Russia and the Gazprom stock
company. The consumers in the region owe nearly three billion roubles for the
The Unified Energy Systems have cut by 10 percent the supplieq of electricity
to the Nizhny Novgorod region on the River Volga for at least one week. The
local energy company has drawn up a plan for cutting debtor enterprises off
power supplies. The Sibur-Neftekhim company tops the list with its 90 million
rouble debt to the energy providers. The region's major chemical works are
likely to follow suit shortly. The seriousness of the situation on the energy
market was definitely confirmed by Nizhnovenergo director-general Alexei
Sannikov, who declared that the only way to avoid such sanctions in the
future is by the timely payment in cash.
All heat supplies have been discontinued as of Tuesday to 60 facilities in
Russia's northwesternmost Kaliningrad enclave. The first to be affected were
the employees of the mayor's office, the regional administration, the Baltic
Fleet heCdquarters, the kriginal internal affairs administration, the medical
schools and the buildings whose owners have considerable arrears in their
payments for heat supplies. And all this at a time when the air temperature
in Kaliningrad does not rise above plus four degrees Celsius.
Govt Economic Strategy Change Expected
6 April 2000
[translation for personal use only]
Article by Vadim Kopin and Vladimir Mashin: "Small Business Will Not
Pull Out Economy"
Perhaps the most encouraging result of V. V.
Putin's victory in the presidential elections is the fact that he has
received a public mandate for implementing the dynamic transition from
weakness of state administration to strong power. Of course, the
historical experience of our country motivates many to view the
strengthening of the state with a certain degree of apprehension. But
even in these circles, they admit that the looseness of the state machine
to a significant degree negates the main thing that reforms have
brought--democratization of the superstructure. At the same time,
strong authority may become a factor in economic growth, because it is
capable of accelerating the implementation of processes which are
objectively necessary for development.
In the years of reform, including in the process of privatization,
the Russian economy practically put an end to the socialist sectorial
monsters, breaking them up into dozens of individual structures. The
break-up of production was achieved in a sphere which encompasses over 60
percent of the economy. First and foremost, it was the excess
idealization of the Western--albeit solvent--economic practice which was
apparent here, according to which small business produces up to 60
percent of the GDP [gross domestic product], as it does in the USA, for
example. The small-scale producer was rightly viewed as the
"formulator" of the middle class--the basis of civic stability.
But alas, the relative share of the active part of the population
which is ready to assume business risk in Russia is somewhat smaller than
in the countries with a Protestant work ethic, where, we might add, it
also does not exceed 10 percent. Due to historic peculiarities, the
work ethic in Russia gravitates toward the principle of commonality, when
it is not the individual success that is valued, but the sense of solidarity.
De-consolidation of production in Russia led to disintegration of the
established technological relations. And the truncated production
structures encountered a most acute shortage of working capital. Up to
80 percent of the new production companies turned out to be unattractive
to investments. Could this be why Russian bankers, as well as foreign
ones, preferred to invest in GKOs [state short-term bonds] and OFZs
[Federal loan bonds]?
And now, at the Center for Strategic Developments Fund under the
leadership of German Gref, they are concerned about the new President's
intention to make the sectors of the Russian economy--at least those
which have a potential for growth--competitive in the face of economic
discrimination against Russia on the world market. The consolidation of
production structures is viewed as one of the options for resolving this
No, this is not a return to the old monopolies. Consolidation will
take place according to a new scheme, primarily a vertically integrated
one. And the restoration of artificially broken production ties will
increase the working capital of the consolidated structures. This, by
definition, will entail an increase in their capitalization--the most
important indicator in investment attractiveness.
Among the specialists who are "feeding" ideas to the institution of
G. Gref on Yakimanka, there is the opinion that the creation of
consolidated--including vertically integrated--structures will make it
possible specifically to optimize production, and to reduce costs and
commercial and financial risks to a minimum. Ultimately, the
profitability of production will increase and, it would seem, so will its
competitiveness. The dependence of production structures on crisis
phenomenon will be weakened, including the dependence on crises
engendered on the foreign markets which have a boomerang effect on our
current small-scale production structures.
The closed cycle achieved in consolidated structures facilitates the
emergence of a higher degree of product processing at every stage of the
technological chain. Consequently, a new, higher, added value is
thereby formed. For example, in the processing of each tonne of primary
aluminum into rolled stock, added value in the amount of $600 is created.
And in processing of this rolled stock into beverage cans, the added
value is doubled once again.
Why is this beneficial to the state? Because at the stage of rolled
stock, a tax in the sum of $150 is paid on the aforementioned $600. But
at the stage of turning the rolled stock into cans, as a result of the
newly created added value, an additional $300 dollars in tax revenues are
received. And increased deductions to the budget aid in the performance
of timely payment of wages to budget workers, pensions, subsidies and
salaries of military servicemen.
By involving both the producers of raw materials, and their
processors, and the manufacturers of the finished product in a single
technological chain, such vertically integrated structures neutralize the
antagonisms between these segments, which previously functioned
separately--such as the memorable wars between the miners and the power
producers, or between the railroad workers and the coal miners.
The sum of indisputable socio-economic advantages of consolidating
production will result in the increased investment rating of the new
structures. It is expected that local and foreign bankers will invest
funds sooner into large production than into state securities--the sphere
where up to 70 percent of the available funds go today.
Consolidated production also has certain political functions, which
are needed by the new authorities for solving problems formulated these
days at Yakimanka.
We know that the new head of state intends to effectively realize a
need which has come due: To separate business from power, to create
equidistant relations between the authorities and leaders of production,
and to replace the behind-the-scenes battles over benefits and privileges
with an honest struggle for competitiveness. In other words--to change
over from an economy of individuals to an economy of legal entities.
In such a scheme, the authorities will be predictable in the eyes of
business. And the large structures, in turn, will by definition act as
predictable and effective partners. Such a new mainstay will allow the
authorities to more effectively implement social policy, because they
will be able to count on a predictable tax base.
Relying specifically on such structures, the authorities will take on
greater moral authority and an economic "support" in mutual relations
with Western economic organizations.
In turn, the large structures--since they will in fact be able to
implement the desire to participate in international division of labor,
which is inherent to capital--will also create an economic basis for a
dynamic and nationally oriented foreign policy of Russia.
Such structures, involving enterprises in various regions of the
country into a single technological chain, will inevitably tie together
individual territories, thereby facilitating the weakening of alarming
centrifugal tendencies. In its own way, the formulation of large
elements of a unified national-economic complex will serve as a
contribution toward preserving a "unified and indivisible Russia."
Moreover, such structures will also fulfill the unique mission of
integration on the expanses of the CIS. After all, by restoring the
artificially broken production relations within the scope of a once
unified national-economic complex, they will in fact implement
integration processes on the post-Soviet space.
No this will certainly not be a retreat from the implemented reforms.
The new form of economic management will fit firmly into the
coordinates of market relations, because the subject of such economic
management will be the owner, and not the sectorial main committees. An
owner who is interested in strengthening this market scheme.
Russian Economic Policy at the Start of the New Administration
Remarks by Stanley Fischer, Acting Managing Director of the IMF1
Prepared for the conference on
"Investment Climate and Prospects for Economic Growth in Russia"
State University: Higher School of Economics
Moscow, April 6, 2000
1. It is a great pleasure to be taking part in this timely conference at the
Higher School of Economics on the economic policy choices that confront the
incoming Putin administration. And it is an extra pleasure to be
participating in a conference organized by my friend and widely respected
colleague, Professor Yevgeni Yasin, with the participation of so many other
leading Russian economists and policy analysts.
2. I will make four main points:
After ten years of experience in over 25 transition economies, the evidence
is clear that the basic economic reform and growth strategy recommended by
mainstream economists works.
Despite the many disappointments and setbacks in Russian economic reform, we
should not underestimate what has so far been achieved in Russia.
The way ahead for economic policy in Russia at this critical moment is clear.
To achieve sustained and equitable growth in Russia will take a strengthening
of macroeconomic stability and the intensification of sectoral structural
reforms, including improving the social safety net.
Worldwide experience shows that economic programs are most likely to succeed
when they are "owned" by the country implementing them, and if necessary
supported by the international financial institutions and bilateral lenders.
Russia's economic program is more likely to succeed the more it is designed
by Russians. The IMF and the international community stand ready to help
support a serious Russian economic reform program, whose seriousness is
demonstrated by progress in its implementation.
3. The experience of the transition economies that started on the process of
economic reform at the end of the Cold War has been studied intensively.
There has rarely been an occasion when so many countries changed economic
policies at the same time; this makes it possible to use econometrics to
study the determinants of their growth experience since the start of
transition. My IMF colleague, Ratna Sahay, and I have examined this
experience, using data from the 25 countries for which it was available.2 We
measure the extent of structural reforms using the indices of different
elements of structural reform constructed by the EBRD. We conclude that the
basic strategy advocated by market-oriented proponents of reform a decade ago
is correct: namely that both stabilization policies and structural reforms,
particularly privatization, contribute to growth; and that the faster is the
speed of reforms, the quicker is the recovery from the inevitable initial
recession, and the more rapid is growth.
4. To say that the basic strategy is well understood is not to say that
carrying out a reform program is easy, nor to deny that the way the strategy
should be applied in each case varies from country to country, nor to deny
that policymakers face technically and politically difficult choices every
day. That is all true, and we must salute those policymakers who have
succeeded through their insights, technical and political skills, and
courage, in moving furthest in the transition process.
5. But it is also true that since the basic growth strategy is understood,
it is necessary to ask what determines the extent to which a country embraces
transition and is effective in undertaking the needed economic reforms. An
answer relevant for some countries is that they lack the technical expertize
to implement the required policies. That could have been true at some early
stages of reform in Russia, but given the technical skills and sophistication
of policymakers in this country, it certainly cannot have been true for most
of a decade. The answers must lie elsewhere, in the political realm, in a
lack of effective political or societal support, and in problems of
governance. I will return to some of those issues at the end of my remarks
6. This seminar is taking place at a time when the public debate in Russia
and abroad has been dominated for some time by disappointment about the
achievements to date and some cynicism about the future. Much of this
skepticism has remained despite the favorable events in the Russian economy
over the past year. While there is much to be disappointed about, and many
negative developments that need to be reversed, Russia also has had positive
achievements during the last decade. I am not talking here only about the
great historical achievement of the last decade, the remarkable extent to
which democracy is becoming entrenched in Russia. Much has also been achieved
in the economic sphere:
Most fundamentally, a consensus has been reached that the process of
transition is irreversible and that the establishment of a truly market-based
economy should continue to be an overriding policy objective and the road to
sustained growth and future prosperity in Russia.
A commitment to low inflation and sound fiscal policies has taken hold across
a broad segment of the public as well as within the political elite. After
the 1998 crisis, some Russian policymakers argued that the country should
welcome moderate--say 40-60 percent--inflation, and that larger budget
deficits were desirable. That did not happen. There is a clear resolve to
limit public expenditures to available revenues and to avoid inflationary
financing. And that is being done.
There has been considerable domestic market liberalization, including price
and wage liberalization and the dismantling of most of the system of state
direction of economic activity. Privatization, while flawed in several
respects, has allowed much of economic activity to be governed by the
incentives of the market. There has also been far-reaching exchange and trade
liberalization, with liberalization of exports and imports, introduction of
current account convertibility, and unification of the exchange rate.
The institutional setting for the conduct of macroeconomic policies has been
strengthened. A modern central bank and payments system have been
established. Interest rates have been liberalized and the elimination of
low-interest CBR direct credits has strengthened the capacity to conduct
monetary policy. Fiscal reforms include large reductions in subsidies,
improvements in the tax system (although this is a job that certainly is not
yet finished), and the establishment of a treasury.
In addition to significant privatization, we have also seen the introduction
of institutions and legislation required for a well functioning market
economy. These include bankruptcy procedures, competition policy and
anti-monopoly reguations, improvements in accounting standards, a securities
commission, and regulatory agencies for the natural monopolies. To be sure, ,
the implementation and enforcement of new laws and regulations has been
inconsistent. Nevertheless, many of the basic underpinnings of a market
economy have been put in place.
7. There has been real progress in these areas, even though these reforms
are incomplete or highly imperfect. Nonetheless, the disappointments about
the overall progress of the last decade are valid, and the setbacks have been
dismaying. One needs only to look at the basic social indicators, with life
expectancy declining and the incidence of poverty increasing. And that takes
us to the next question:
What needs to be done?
8. In 1996 there was decisive progress in achieving macroeconomic stability
in Russia. However fiscal policy and the record of policy implementation in
the structural area after that was poor. While the government's medium term
program adopted in 1996 constituted a coherent and comprehensive structural
agenda, performance in that area during the life of that program was very
weak, and was a fundamental factor leading to the Russian financial crisis in
1998. And little has been done to tackle Russia's deep-rooted structural
problems since then.
9. Russia's commitment to low inflation and sound fiscal policies is evident
in the continuing decline in inflation over the past year, and in the
improving fiscal situation. However it will take a broad-based acceleration
of structural reforms, not only to increase growth, but also to maintain
The recovery in output, the improvement in the fiscal position, and the
notable measure of financial stability that has been achieved has in large
part--though not entirely--due to the effects of the sharp real depreciation
of the ruble in the wake of the 1998 crisis, as well as the jump in world oil
Sustained growth and the further fiscal consolidation that is needed to
maintain macroeconomic stability will require an acceleration in structural
reforms to spur investment activities and strengthen exports, as well as
comprehensive tax and expenditure reforms.
The goal of many of the needed structural reforms is to improve the
investment climate, primarily for Russian investors, but also and importantly
for foreign investors. The large amounts of Russian capital now abroad will
begin to return only when the investment climate changes, and as it comes
back and investment picks up, so too will growth--and here I echo the theme
of this conference, on the investment climate and the prospects for economic
growth in Russia.
10. What should be the focus of the structural reform effort? There are 19
groups in this conference discussing different areas of reform, and the new
government will have to make progress in all those areas. Four topics are
grouped under the heading "state regulation of the economy: freedom and the
rule of law". That is critical. It is part of the pressing need to increase
transparency in the economy, in both the public and private sectors. This
will be a crucial factor in assuring external support for the Russian
11. Rather than go in detail into the overall program, let me select six
industrial restructuring, including privatization, and other measures needed
to improve the business climate--especially in corporate governance and
strengthening of the rule of law
measures to eliminate the nonpayments and barter problems;
restructuring of the banking system, including reform of the central bank;
tax reform, and expenditure reform, including reform of the civil service,
which has grown remarkably in the last decade;
strengthening of the social safety net;
agricultural reform and land ownership reform.
With progress in these areas, the stage will be set for Russia to begin
sustained growth, allowing its people to fulfill their potential.
12. It cannot be overlooked, however, that many if not most of the proposed
measures have already been part of government programs in the past--they have
just not been implemented. Why? The poor record reflects, fundamentally, a
failure to overcome fierce resistance from vested interests in the face of
weak government consensus. There are many examples, but let me mention three
areas that have been the subject of discussion in this conference--bank
restructuring, tax reform, and the rule of law:
Following the collapse of a large number of banks in the aftermath of the
1998 crisis, the authorities made little use of the authority granted within
the existing legal framework to place ailing banks under administration. By
the time these banks were subjected to bankruptcy procedures, they had become
mostly empty shells. One result is that bank restructuring will be more
expensive than it otherwise would have been.
Tax enforcement is another key area. Politically influential enterprises have
been able to pay well below their statutory tax obligations for years,
without effective government penalty. Indeed, instead of strict enforcement
backed up by bankruptcy or criminal proceedings against owners and managers,
we have witnessed numerous schemes of tax restructuring and rescheduling, and
negotiated settlements. This treatment of large taxpayers has been
accompanied by much tougher treatment of smaller enterprises and individuals.
Against the background of very favorable energy prices, revenue performance
in the last year has improved, but this problem still remains.
The failure to strengthen the rule of law and improve governance both in the
public and corporate sectors is at the heart of weak investment, the failure
of enterprises to restructure, and capital flight. It helps account for the
extremely low level of foreign direct investment. FDI in Russia has run below
1 percent of GDP, compared with around 3 percent of GDP in the Central
European transition economies. An improvement in the investment climate could
reap big rewards for the economy in this regard. It could also help reverse
capital flight, which has averaged $10-20 billion per year since the early
1990s. Russia's economy, and Russia's financial needs, will look very
different when Russian savings, instead of fleeing abroad, is used to finance
productive investments in the domestic economy.
13. Why mention these past failures? Because this, the start of a new
administration, working with a new Duma, presents a rare opportunity for a
second beginning. Many of the problems of the past occurred because there was
not sufficient support for the economic reform program within the political
system and the society. Some of those problems happened because the policies
were badly implemented. Many lessons have been learned about policy in
transition economies in general, and in Russia in particular. The question
now is whether it will be possible for Russia to develop its own economic
reform program, a program worked out by Russians, and effectively supported
by the society, a program owned by Russia.
14. We have seen in this conference that there is no shortage of good ideas
about what those policies should be. What is needed now is to translate this
knowledge and energy into a coherent reform strategy that is backed by strong
public consensus and leadership, and that is implemented. If that happens,
the IMF--and I am sure also the rest of the international community--will be
ready to do what it can to support and strengthen the program and Russia's
1Prepared for the conference on "Investment Climate and Prospects for
Economic Growth in Russia", State University: Higher School of Economics,
Moscow, April 5-6.
2See Stanley Fischer and Ratna Sahay, "The Transition Economies After Ten
Years", IMF Working Paper, WP//00/30, February 2000.
START II: LONG AWAITED SENSATION
By Interfax analysts Igor Denisov and Vitaly Davydov
MOSCOW. April 11 (Interfax) - What is going to happen on Friday is
a kind of long overdue sensation: the State Duma will debate
ratification of START II and may well ratify it.
In less than seven years since its signing and five years since it
was sent to the Duma this treaty which is of fundamental importance for
Russian - U.S. relations Moscow has on several occasions been about to
ratify it but each time something happened that made this impossible.
Once it was the NATO plan of eastward expansion, then it was the NATO
operation in Yugoslavia which Russia regarded as aggression.
A pretext could be found this time, too. In particular, communist
leader Gennady Zyuganov has said that the U.S. plans to set up a
national anti-missile system make it impossible for the Left to vote for
ratification of START II.
In its present form the treaty benefits only the United States and
is unacceptable to Russia whose defenses can be harmed, he argues.
Russian generals believe, however, that the opposition's case
against the treaty has no leg to stand on.
Col. Gen. Vladimir Yakovlev, the commander of the strategic rocket
force, has told Interfax that by 2007, when the treaty is to be
implemented, Russia's heavy multiple-warhead intercontinental missiles
will come to the end of their service life.
"Whether Russia does or does not ratify START II, heavy missiles of
the RS-20 and RS-18 type will have to be decommissioned by 2007," he
In effect, "START II has become a treaty under which the United
States [alone] will reduce its offensive weaponry," Yakovlev said.
Those who fear that the United States will pull a fast one on
Russia with the building of an anti-ballistic missile system have also
been answered. "Ratification of START II in a package with the New York
agreement of 1997 on the setting up of a non-strategic missile defense
system would benefit Russia in every respect," Russian Security Council
Secretary Sergei Ivanov said on Monday after a meeting President-elect
Vladimir Putin had in the Kremlin with Duma party leaders.
Russia and the United States have agreed that the ABM Treaty of
1972 implies that a non-strategic missile defense system can be built,
he said. By ratifying the passage Russia would send the world a signal
that it opposes U.S. opting out of the ABM Treaty.
The support in the State Duma for ratification of START II and
protocols on extending the deadline for the implementation of the treaty
and on making a distinction between a strategic and a non-strategic
missile defense system will be sufficient next Friday, parliamentary
The entire pro-Putin Unity group which has 81 seats in the Duma and
its kindred People's Deputy group (58 seats) are expected to vote for
ratification. Because former Prime Minister Yevgeny Primakov, the leader
of the Fatherland - All Russia, is a staunch supporter of the
ratification, his group may cast all its 47 votes in favor of it.
The Union of Right Forces with 33 seats and Yabloko, 21 seats, will
obviously vote for ratification. At least one half or even two thirds of
the Russia's Regions group may support the ratification , experts say.
If these groups turn up in force, 260 to 270 votes can be cast for
the ratification while the minimum to see it through is 226 votes.
The Communist Party's 95 and the Agroindustrial Group's 36 Duma
members are expected to vote against.
The only unknown quantity is the position of the liberal democrats
who have 17 seats in the Duma. Its leader Vladimir Zhirinovsky said on
Monday that his supporters would oppose the ratification but his
position may change. On the other hand, this will not make much of a
In effect, if the turnout is good, 240 to 250 Duma members will
support the ratification.
What is obvious is that the Kremlin's arguments in favor of
ratification are very much what it said a year ago, two years ago and
three years ago. What has changed? Why does the anti-American rhetoric
of the Left not work this time?
The answer seems obvious. The new Russian president who is still
being criticized in the West for what is going on in Chechnya is sending
a clear signal to Western leaders that he is in control of the situation
in the country, that his supporters are in control of the Duma and that
the new Russian Cabinet will not embrace anti-Americanism, anti-
Westernism or isolationism, no matter how much some desire this.
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