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Vremya MN
No. 218
[translation from RIA Novosti for personal use only]
Interview with the executive director of the Expert Institute, Andrei NESHCHADIN, taken by Vremya MN correspondent Galina POLOZHEVETS

Question: It is already ten years since Russia began its reforms, but we still discuss whether they were good or bad for the country and whether we could have done without those changes.

Answer: In my view, if we describe this process as the changing of the social, economic and state structure, those were revolutionary changes, although they were largely a reflex action.

Now, ten years after, there is hardly any need to remind you that Russia's transition from a centralised, planned economy to a market economy was accompanied by a serious economic, financial, social and political crisis of the system. The break-up of the Soviet Union aggravated it still further.

I think it is worth citing some figures showing the scale of the economic crisis which hit Russia in the first years of independence. In 1992, the country's gross domestic product decreased by 14.5 percent from the previous year. In 1993, the decrease was 8.7 percent, and in 1994, 12.7 percent. The decline rate of industrial production was even greater: 18 percent in 1992, 14 percent in 1993, and 21 percent in 1994.

Another distinguishing feature of the economic crisis in Russia in the early 1990s was runaway inflation. Consumer prices and service rates in 1992 zoomed 26.1 times over, in 1993 -- 9.4 times over, and in 1994 -- 3.2 times over.

Consequently, the standards of living decreased substantially, too. The average real monthly salary in 1992 shrank by 33 percent. In the next year, it remained at the same level, but in 1994, it decreased again, by eight percent.

Russia was losing its positions in the world economy. The gap in economic development between Russia and the leading Western countries kept growing.

The catastrophic reduction of the state's hard currency reserves posed a great threat to the Russian economy. In 1989, these reserves stood at 12-13 billion dollars, whereas in late 1991 they were estimated by Western experts at 1.3 billion dollars.

Question: And then Russia hurried to take loans.

Answer: Yes, at that time the government sought to borrow as much money as it could, not even realising what amount of funds it needed to overcome the crisis. However, the issue of financial and economic aid to Russia in the early 1990s was a subject of heated debates in the West. The West's position was formulated very well by Stanley Fisher, who was first chief economist of the World Bank and from 1994, first deputy managing director of the IMF. He said that the West had a right to fear that economic support would not yield any essential results. Yet, without Western support, Russia would not be able to balance its budget and curb inflation to a level that would enable it to continue reforms.

Loans given to Russia by the West in 1992 played a positive role. They enabled Russia to purchase vital goods abroad. Another very important move by the West was the deferment by creditor states of the payment by Russia of the Soviet Union's foreign debts. Yet, the West was divided on the amount and forms of aid that needed to be given to Russia in 1992.

According to estimates by Western economists, Russia needed $30 billion in foreign loans a year for five or six years to overcome the crisis. However, for various reasons, Russia did not receive those funds, this is why the price of reforms, especially in 1992 and 1993, was a drastic decrease in the living standards of the population and in the country's gross domestic product.

Question: Indeed, the situation was very critical. The government seemed to be at a loss.

Answer: Accelerated fiscal privatisation could help overcome the situation that had shaped in the country by 1993. However, the high inflation rate made money possessed by enterprises, organisations and private individuals worthless. Only a small number of banks and export intermediaries, which speculated on differences between domestic and external prices, had the required amount of funds to privatise businesses. This was the only money that could be really used in privatisation.

In that period, the government considered several ways to achieve financial stabilisation: reducing budget spending (which was impossible in many parameters), covering the budget deficit with new sources of income or loans, or curbing inflation. The government chose two ways: earning additional budget revenues from privatisation, and creating a system of official domestic loans.

Apart from fiscal purposes, privatisation was also intended to help form a well-to-do class loyal to the government. This class could emerge only as a result of accelerated privatisation of export-oriented raw material industries and control over financial flows by individual commercial banks. At that time, the financial basis for large private capital could be created only by servicing budgetary and export-related financial flows. This is why privatisation, carried out by presidential decrees, was of a pronounced political, rather than economic, nature.

The experience of Russia and the Czech Republic showed that voucher privatisation could not be effective at all, especially in Russia where institutional reforms were accompanied by high inflation and production decline.

Actually, it stimulated the creation of a corrupt state. The trading of benefits for political support for the government began in October 1992 when the then prime minister, Yegor Gaidar, signed government resolutions granting benefits for individual enterprises. The state could not and did not want to collect taxes. In this case, the easiest and most effective move was the creation of super-large monopolies in the fuel/energy and financial sectors, which actually were "collectors of tribute," to which the state and political forces later laid claims. This process culminated in the 1996 presidential election and the emergence of seven large banks which actually paid for Yeltsin's re-election.

The 1998 credit default, which can be described as the bankruptcy of Russian Government Ltd., ruined banking oligarchs and the middle class of Russia. The living standards fell again, and the middle class lost its savings. In that situation, the government proved unable to continue investing in the national economy and to become an effective owner of its property and natural resources.

The default put an end to the five-year-long attempt to conduct economic reforms from above, without reforming society.

Question: And still, one cannot but admit that we have managed to extricate ourselves from the inflation quagmire. The years after the default were not the worst for the economy of the country. Why? What do you think?

Answer: You know, defeats do not have fathers, as a rule, whereas victories have too many of them. Today we are told that we owe the present-day economic growth to Gaidar, as this growth began in keeping with his plan, after we achieved financial stability, although we are seven years late, or to the Kiriyenko-Nemtsov government whose resolute moves in declaring the country's default marked the "moment of the truth" for the economy. Some people link this growth with the government of Primakov and Stepashin. In real fact, the country just reached a turning point when further reforms were possible only from below, owing to enhanced economic activity by industrialists and entrepreneurs.

Naturally, external factors - fuel price hikes and the devalued rouble - played a major role in that. But it is only now that the reform of society and its relations with the government has begun. One cannot say yet that this process has become stable and irreversible. Russia has not yet fully overcome the crisis, and we continue living in a transitional state.

Question: What changes do you think should be made by Russia to receive the status of a country with a market economy?

Answer: Today, reforms can be continued only if oil prices grow and if large export-oriented companies make deductions to the budget. Unlike developed countries, the Russian population, because of its low incomes, cannot yet be the main source of budget revenues.

This is why, to ensure budget surplus and an inflow of investments, the government has to choose one of two options: introducing rigid rental payments as the basis of the tax system, or enter into a dialogue with business to ensure stable conditions for economic development and to make the investment climate attractive. So far, the government has been trying to use both ways, building a corporate model of society's organisation.

Apparently, the continuing decline in oil prices and, subsequently, the reduction of rental payments will prompt the government to speed up reforms and to further liberalise the economy and society with a view to preserving budget surplus.

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