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Nezavisimaya Gazeta
December 19, 2001
The Economy of Debt
Why things are better in Russia than in Argentina?
By Vitaliy Sednev

A recession which economists had predicted long before September the 11th is becoming a real fact. Production is shrinking in the United States and Japan. The European economies where growth accounts for less than two percent will be unable to make up for that fall. The economic growth in South and South East Asia is not expected to be higher than 1.7 percent in 2001.

What impact will the world economic problems have on Russia is not an idle question. We still remember that the 1997-1998 Asian crisis dealt a hard blow to Russia.

True, production output has been growing in Russia for the third consecutive year. With a 5.5 percent GDP growth, the Russian economy was one of the most fast-growing in 2001. Whether this growth is stable is another question. Prices for oil, aluminum and gas are falling, while export revenues, and even the Central Bank reserves, are dwindling. However, a lot of factors make the current situation look different from what it was back in 1998. Take a look at the stock markets, for example. In the 1990s Russian indices used to plunge upon receiving any bad financial news. The Russian markets followed suit each time the Dow Jones index went down. Russian shares fell in the wake of the Korean crisis, and low oil prices caused a collapse in Russia. Now, that dynamics has changed.

There are factors, the way how the state debt is administered in the first place, which can stabilize the situation from the inside. The actions of Central Bank Chairman Viktor Gerashchenko and the ideas of Andrei Illarionov form the backbone of the state debt policy. Despite the fact that Geraschenko is a conservative and Illarionov is a liberal, President Putin has found a "technological" application to their ideas and proposals. An "anti-dollar umbrella" has been set up to protect enterprises from world instability.

Central Bank Chairman Viktor Gerashchenko has closed the internal state debt market to foreign portfolio investors. The Bank has forbidden free conversion and repatriation of revenues from transactions with state securities. As a result, the flight of capitals from developing markets in 2001 did not affect Russian markets because there were very few financial means which could actually flow abroad. Illarionov was the first to suggest a concept that the Russian foreign debt should be administered. He was categorically opposed to debt restructuring during talks with the Paris Club of Commercial Creditors last autumn. His calculations showed that Russia would benefit more from paying its debt now rather than from repaying interest later and repeating the mistakes of the 1990s. Russia has restructured its debt ten times in the last ten years and has brought it to 17 billion dollars. However, many politicians found it hard to give up the logic of the 1990s and continued to insist that the payments would be an excessive burden on the budget and that Russia should ask for more credits. It seems that this year's economic dynamics proved that Illarionov was right.

A revival that started in February 2001 was the economy's first positive reaction to Illarionov's decision to pay off foreign debts . The external situation look paradoxical. An industrial growth occurred after dollars had been taken out of the country. It is natural that the old logic should prompt the opposite: "The more foreign currency is accumulated inside the country, the better." However, this is not so!

High oil prices and abounding dollar revenues from oil sales are not beneficial to all. They give a chance to earn profit to the oil companies and oil-related industries and undermine the competitiveness of other branches accounting for 90 percent of the Russian economy. Foreign currency inflows increase domestic market prices. The ruble becomes too expensive. Expenses also tend to grow. Imports replace domestic products, which turn out to be too expensive in foreign markets.

Only eight million people in Russia have access to profits from exports of raw materials. The rest are employed by "second rate" economy, i.e at enterprises that had been in a unique competitive stalemate before August 1998.

The country lacks money was Russia's motto in the 1990s. Anatoly Chubais, Sergei Dubinin and Sergei Kiriyenko wanted to attract more foreign currency at any cost. They did that in the form of foreign borrowings. The treasury bills pyramid and "currency corridors" were erected and built to achieve the same goal. In the end, Russia got a lot of money, its foreign debt increased by 55 billion dollars but its own economy did not grow. The Russian industry revived after the August 1998 crisis when the financial bubble blew up. Machine-building, the food and light industries started to develop fast. Employment increased by two million. That proved that investments were the only thing required for normal economic development. Another new positive factor which was totally absent before is the financial discipline of the state.

Debts and dependence are the inevitable price of any foreign borrowings. It was not a long time ago that the IMF emissaries dictated how large our taxes should be and what the ruble rate should be like and decided whether a new tranche should be granted to Russia.

The current Russian authorities had to make a choice: either to get rid of the credit burden or to leave things as they are. It looks as if the Russian leaders had made their choice. Russia is repaying its debts. That means its policy no longer depends on foreign creditors' demands. Russia's foreign debt has decreased by 22 billion dollars in the last three years. President Vladimir Putin said in October that Russia would pay off foreign debts ahead of schedule. Russia owes about 137 billion dollars on the principal debt. If no new borrowings are made, Russia will have to pay almost 360 billion dollars in the next 30 years on condition that the payment schedule is observed. If we borrow more we will have to pay more. It turns out that paying ahead of schedule is more beneficial. It gives Russia a chance to reduce interest payments and to preserve resources for social programs and salaries to public servants.

Young reformers used to claim that paying pensions and salaries to public servants was impossible without borrowing loans from foreign banks and selling state property. As a result, the real wages fell and production kept dwindling every year, while the debt noose was tightening around Russia's neck. Some government officials have recently resumed their talk about new IMF or Paris Club borrowings. Some suggest placing the Euro bonds. However, President Putin seems to have another approach. He believes that Russia should live within its means.

Experts often compare Russia with Argentina and Turkey. Turkey that used to be a pet for foreign investors is in permanent crisis and is asking for financial aid. Argentina has literally repeated Russia's 1998 mistakes and is balancing between a default and devaluation. The International Monetary Fund has agreed to grant eight billion dollars worth of aid to Argentina. However, the loan will be in vain, if the government continues to pursue an inadequate policy. Argentina is asking for a new 1.3-billion dollar tranche. Russia is not asking for anything. That means it stands a chance to continue industrial growth next year.

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