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#12 - JRL 7033
January 24, 2003
Are Russian Reforms a Bluff?
Western capitalists have no place to remove their capitals to their
economies are the best. The situation is different for Russian capitalists

Discussions about the Russian reforms of natural monopolies has become one
of the most favorite subjects of publicists and politicians. However, these
debates omit the key question, whether reforms planned in this form will be
effective at all. All publications on the problem assume that they will be
effective, it is actually very important to carry out the reforms as
quickly as possible.

There are two objectives of reforms realization that are traditionally
mentioned: the first is creation of competitive environment as an
instrument for reduction of prices for services, and the second is that
investments must be attracted in order to develop Russian industries.
However, as analysis of the reforms essence revealed, both outlined
objectives of the reforms cannot be achieved with those methods that are
suggested for realization of the reforms.

The most important fact is that no competition environment wont be
created. This environment is possible when a client can go to some other
salesman if he fails to bargain about the price with the previous salesman,
when the client can buy any goods from another salesman without obstacles.
However, all suggested reforms suppose that consumers are served with only
one exact feeder (RAO UES of Russia, the energy monopoly), or only one
railway line (the RF Railway Ministry), or a gas pipeline (Gazprom), or an
exact water-pipe (communal and housing economy); which certainly means that
clients have no free opportunity to choose any supplier. Reforms that are
suggested for realization in Russia offer to replace natural monopolists
partially regulated by the government with completely private monopolists,
with capitalists whose greed can be unlimited. No doubt that when
monopolies spend much efforts and money to get ownership of a pipe (or a
knife-switch or a railway switch), they will then centre out on consumers
when they become rightful owners of these pipes and switches. What is more,
precedents of this kind have been already registered. This is the key
problem of prospective reforms in Russia, but unfortunately, it hasnt been
yet touched upon.

Besides, another fundamental problem concerning investments attraction is
still unanswered. There are whole sectors of private capital in Russia,
however, removal of the Russian capital from the country is all the same
higher than incoming of capital. As the RF Statistics Committee reported,
over the nine months of 2002 Russian proprietors invested 16.3 billion
dollars in establishments situated abroad, but the sum of attracted
investments in Russia made up only 12.9 billion. And this is just
information provided by the official statistics. Besides, all financiers
admit that illegal capital outflow makes up between 20 or 30 billion
dollars per year; the sum considerably increased when the authorities
passed a decision to liberalize the regulations on obligatory sales of
currency proceeds.
And the explanation to this course of things is clear: foreign economy is
already stabilized, which means that dividends can be received in the
nearest three months already; and it is problematic to predict when a newly
built enterprise in Russia will return interest. It is necessary to buy
equipment for this new enterprise and recruit workers, which certainly
creates too many problems. For Russia, it is also important to have such
management that wont steal.

By the way, this is the principal difference between developed and
developing countries; however, this fact is always ignored by Russian
macroeconomic theorists when they appeal to us to have patience to go
through the period of wild capitalism. Any proprietor in any country is
motivated by the wish to increase earnings and standards of his own life.
Proprietors in developed countries have one way to follow: they increase
labor productivity at their enterprises, optimize the business structure,
develop technical equipment and increase sales volume. In order to sale
products that they produce, purchasing capacity of the population in
developed countries must be increased, which means that remuneration of
labor must be about 55% of GDP.

And Russian proprietors think they dont have to take care about such
problems. Instead, they prefer to collect some sum of money (at that,
workers are paid only 25% of surplus value; depreciation, R and D work and
other investment activities are ignored at that) and then to invest this
money in some stabilized foreign economy. And thats all: there is only
sheer calculation, no particular misanthropy of Russian proprietors. To
tell the truth, western proprietors would do the same if they had some
other stabilized economy at hand, but currently they have only their own
economy. A question arises: do economic reforms provide for any measures
that would make Russian proprietors focus more on investments in their own
enterprises? Until now, they eagerly ignored such investments.

Thus, the economic reforms that are suggested for realization in Russia
provide no solution for the problem of investment attraction and for
creation of favorable conditions for consumers. On the contrary, these
reforms resemble the idee fixe on speeded total privatization that was
declared to be a panacea for all economic and social problems. But although
it is often said that private property is more effective, nobody has ever
presented any proof of this thesis. For this very reason, it would be nice
for Russian deputies of all levels, before they take decision concerning
realization of reforms, to demand for more substantial arguments proving
that suggested reforms wont aggravate the unfavorable situation in the
basic Russian industries.

Alexander Artyomov
Candidate of technical science
Special to PRAVDA.Ru
Translated by Maria Gousseva

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