#12 - JRL 8056
excerpt with Gref and Yasin
TITLE:
REMARKS BY AMERICAN CHAMBER OF COMMERCE IN RUSSIA PRESIDENT ANDREW SOMERS, RF MINISTER OF ECONOMIC DEVELOPMENT AND TRADE GERMAN GREF, US AMBASSADOR TO RUSSIA ALEXANDER VERSHBOW AND EXPERT INSTITUTE DIRECTOR YEVGENY YASIN AT THE 5TH ANNUAL AMERICAN CHAMBER OF COMMERCE IN RUSSIA INVESTMENT CONFERENCE
[RADISSON SLAVYANSKAYA HOTEL, 9:00, FEBRUARY 4, 2004]
SOURCE: FEDERAL NEWS SERVICE (http://www.fednews.ru/)

Somers: It's now my pleasure to introduce one of the most well known people in Russia, if not the world, a man who has been a leader in the reform and reconstruction of the Russian economy and continues to be going forward, a man that the business community certainly looks to as someone who understands what the issues are in business, a man who has been influential in areas from small business reform to tax legislation to administrative reform. I won't go into his illustrious biography because of time constraints. It's now my pleasure to ask to the podium Minister German Gref.

Gref: Ladies and gentlemen, it is a great pleasure to be attending this session and meeting our erstwhile friends and I am very grateful to the Chamber and to the Russian colleagues, to Arkady Volsky who is heading our cooperation on the Russian side, the Russian-American cooperation and indeed in these recent years much has been done in terms of a better understanding of what is happening in our countries, in terms of a better interaction between the state structures of the United States and Russia and between the business communities.

I must say that we can see this qualitative change also in the figures, we can see a substantial growth in US investment in the Russian economy. This is also everything that is connected with the growing interest on the part of the Russian entrepreneurs in the American market and we can see that so far it is yet a "dotted" interest but still it is a stable and permanent interest and Russian business is also beginning to actively operate on the US market. It is very interesting to watch this process, because we can practically see how every several months there are reports about Russian companies becoming participants in full right in the American market.

Now I would like to say a few words about our plans, about the problems that we can see as priority problems, especially if we consider that Russia is in the expectation of the presidential election. This always brings a certain element of instability, a certain set of questions or attempts to forecast what will happen after the presidential election and naturally it is interesting to know what the results of the election will be.

I wish to say that today we are in a certain privileged situation compared with our colleagues and also compared with us in the previous years. It is because we have very little time and forces that we have to dedicate to attending to the election problems. In this sense, President Putin made us a good present and we can calmly attend to our respective affairs by virtue of the fact that the situation that we have in the political area is quite stable. Of course, it is always an ungrateful exercise to try to predict the results of the elections. Still, however, we can say that today the Russian government, almost a month in advance of the presidential election, can devote most of its time to interacting with the Russian parliament and prepare the drafts of important legislative initiatives for which the country still has acute need.

One of the most serious problems is that of the unfinished nature of the construction of the legislative field and in this connection I will reproduce here some of the touches so as to paint for you the main vector, the main direction of our thinking and of the reforms that are coming.

We want during the spring session of our parliament -- and given the technology of parliamentary work this is the most productive time when the parliament can devote maximum time to examining the draft laws submitted by the government by virtue of the fact that in the autumn session very much time is taken by the budget process, the examination of the budget -- to adopt quite a number of major regulatory acts.

The first one of them is to completely renew the entire legislation related to the uses of nature. Two weeks from now, at the government meeting we plan to examine and approve two codes: they are the Water Code and the Forest Code of the Russian Federation. Now a series of public discussions is taking place, a series of the so-called zero readings when before submitting the draft we work together with the deputies of the Duma and the Federation Council to discuss these projects so as to accommodate the greatest possible number of proposals from the business community and from the Duma members in the draft documents. After this we get together in April or maybe in May -- to examine the draft law on the subsurface resources of earth.

This law will regulate the entire procedure, the order, the provision of rights and guarantees of rights of investors to use the subsurface resources. We are planning it in a way that we expect the two draft laws will be adopted in the spring session and probably we will be able to submit the second draft for the examination by the parliament in the spring session, so maybe it will be able to be adopted in the fall but that would depend on the schedule of our joint work with the parliament.

And there is the second most serious block of draft laws which has to do with the continuation of the tax reform. We want now in the maximum way to concentrate on drafting the final wording of amendments to the key tax laws so as to finalize all the amendments related to the changes in the Tax Code of the Russian Federation. These changes will concern such major taxes to undergo a change, as the single social tax in regard to which there are quite persistent wishes on the part of the Russian business community concerning reducing the tax. Today there is still a high share of illegal wages and in a situation when the cumulative pension system and the need to guarantee the rights to an insured pension system it is of course very important for us to have a legal sphere of wages so as to completely safeguard the rights and the protection of the rights, including the pension related rights of the citizens.

We are planning to take steps in order to seriously cut down on the rate of the single social tax. In regard to the final configuration of it there are several proposals as to how this should be done. And I hope that before the end of February we will adopt the final design of these changes.

The second component is the VAT. Here we also have different proposals regarding lowering the rate and regarding the introduction of special VAT accounts by virtue of the fact that at the present time -- in regard to this tax -- the Russian business is expressing one most serious grievance which is that concerning the inequality of rights as between the subjects of the market.

The criminal so to say business related to VAT refund has reached quite a dangerous scale in Russia and we need to take serious measures to improve the administration of this tax by virtue of the fact that the entrepreneurs are in different situations in fiscal terms. Some pay taxes, some optimize it and don't pay taxes. In addition to not paying the taxes, they even get illegal refund of that tax from the budget. Actually, they produce nothing. This has become a separate branch of criminal business. Of course, both the business community and the government are very seriously upset by this problem. We have already discussed this at a meeting with entrepreneurs and we plan another such meeting and discussion in February and then to take the final decision on the problem.

And the third component, which is very serious, is transforming the taxation of the users of subsurface resources. This is also the configuration of taxation of the extraction of mineral resources and export duties. Here we also want to introduce some changes which however are not of a radical nature such as those that are declared of late by some politicians or proposals to remove scores of billions of dollars. We are not planning this, we are now engaged in consultations with the oil enterprises and gas enterprises and at issue is additional removal -- given high prices -- of about 2-3 billion dollars. Also in February I think we will finally decide on the configuration of changes in this part of the legislation. In principle, over the medium term, the bulk of the Tax Code will not be subjected to such global transformations because at the present time the requirement of Russian business is that of stability. The business community says that it is very important -- for the medium term -- to lay down at least the tax relations so that business could make forecasts when "designing" business and when planning its economic activity, in regard to medium term tax conditions which are key to defining the level of the rate of return on investment and taking investment decisions.

The third is probably a very serious transformation which we assume to encompass everything that is connected with the delimitation of powers between the constituent members of the Federation, the municipalities, and in this area amendments are now being drafted to more than a hundred laws. It is quite a big effort and we have a special group of people who study the need for introducing changes. Of today, it is 160 regulatory acts. Unfortunately, we did not have a historical delimitation of powers between the various levels of power and with us everybody was responsible for everything.

As a result the guilty party was always to be found, regrettably, among citizens or entrepreneurs, the one who was the subject of the exercise of his rights. An opaque and quite complicated system was established in which there are many administrators but few guarantees of the exercise of the rights and few clear mechanisms for the exercise of the rights. So, the first thing we want to do is to introduce order so that every function allocated to the state, to one level of competence, be the responsibility of one level of authority. In some cases it is mixed competence but it is an exclusive list of such competences and thus the spheres of responsibility of each level of authority should be spelled out as well as the interaction mechanisms.

Now such work is being pursued. Basic laws have been adopted last year and in this year we are to adopt some substantive amendments in all the existing legislation which will permit us to clearly define the sphere of competence of each level of power. Appropriately, this should be connected with budget changes so that for the level of competence of each level of government there could be an appropriate level of financing. This has never been done before.

This is also quite a serious work on which our specialists are now working and I hope that before this year is out we will get at least the basics of this system and it will start functioning already next year.

The third component is the administrative reform, all that we mean when we speak of administrative reform. This involves in principle defining the place and role of the state in a market economy and defining the quantity and the level of state intervention and the competence of state authorities at the federal level. Today we have a situation when in practical terms the same functions are allocated between scores of departments. Because of this, many good intentions and initiatives are undone in the course of interdepartmental harmonization. Not infrequently, there is no single authority which is responsible for the exercise of one function. There are no clear procedures for the implementation of particular functions. All this leads to a situation when the activity of state authorities becomes nontransparent. There is the lack of personal responsibility, the lack of a person who is clearly responsible for the exercise of particular functions which leads to a situation when the exercise of harmonization means the start of corruption. It is because when there is no responsible person, when there is no comprehensive procedure, there is always the possibility to refer to somebody, to delay the process and to resolve some particular questions only after an appropriate "incentivizing" at the personal level.

By virtue of all this, the now active commission on administrative reform is preparing a package of regulatory acts. According to specialists, at present there is the need to make changes in 800 regulatory acts which would drastically cut the functions of state bodies and put the state within the field of market regulation of the economy, into the field of clear procedures, bans on administrative intervention in the affairs of business. During the pursuit of the administrative reform we have seen it only at the federal level that over 30 government authorities have the right to suspend the activity of business entities without the sanction of the court. Quite a radical decision has been taken to strip government administration bodies of all such powers and to make the procedure of suspending the operation of an enterprise the prerogative of judiciary bodies. This, of course, has prompted discussions and debates. For example, the issue of stopping the operation of an enterprise if safety rules or fire precautions are violated. But practice has shown that even such empowerment of judiciary bodies does very little in practical terms for protecting the health, lives and safety of people. Unfortunately, these powers are often abused and we see that the existence of such powers does not diminish the huge number of fires and accidents.

So, we should seek modernization of the work of the law courts so that such situations are treated promptly, and also so that the aggrieved party could always have the right to appeal with an independent court instance.

This is just one example and they can be easily multiplied. Certainly these are very complicated processes because the structures that have for years geared their work to exercising certain powers do not have a clear idea of their new functions. People are used to working under old laws and that of course often gives rise to serious debates. Nevertheless, the President and the government are committed to passing the basic legislation for administrative reform.

That work fully incorporates self-regulating organizations, the Russian Chamber of Commerce and Industry, the Russian Union of Industrialists and Entrepreneurs. And I must say that self- regulating organizations are in many ways the driving force behind the administrative reform because as you know the most difficult job is for the bureaucrats to reform themselves. This is often about intentions but not results because there is also a chance of drowning the good wishes in bureaucratic procedure to prevent the initial good intentions being realized.

In this instance, we have considerable assistance from the media which monitor this problem. This is one of the topics that interests the media at present. And I should also note the role of our business structures which have a very strong interest in creating a competitive and effective state which is a shackles on the feet of business. As a representative of government I must say that business in Russia at present is much more competitive than the bureaucracy. And we today must exert every effort at least to even out the situation. Otherwise the conflict between the institutional conditions created by the power bodies and business which is forging ahead will be inevitable and it will definitely slow down the country's economic development.

The transformation of power, the creation of an effective and transparent state is perhaps one of the most serious global tasks for Russia.

I would like to mention yet another challenge. This year we must lay the ground work for the transformation of the social sphere. That applies to health, education, science and culture. Unfortunately there is a lot of work ahead in this field. And the legal framework at present is preventing us from creating a market social infrastructure, it is not geared to the needs of people, it is financed on the cost estimate principle out of the budget and it is a system that ignores the consumers of services. It looks entirely to the budget which finances regardless of the quality of services. That kind of financing is not enough, it still makes it necessary for the population to complement the social benefits in all spheres. Nevertheless, quality services are very hard to come by in the market.

So, we propose to change all the mechanisms of state financing of that sphere. We are to devise a special form into which all the state institutions will be transformed and they will be financed out of the state budget depending on the amount and quality of the services rendered to the population. Money will be transferred above all to those institutions in which the population is interested, for which the population will vote with their feet, institutions that get the largest number of calls and those of course will be the ones that will offer the best and the cheapest services. That will create a competitive environment in the rendering of traditional social services.

Some of these spheres may be transferred totally to this system when money follows the client, the patient, the student, etc. And although this may take several years, we hope that it will bring about a breakthrough in the quality of services rendered to the population and that the concrete citizen will at last be the focus of that system. If budget disbursements are assured regardless of the quality of services rendered, we will never achieve a situation when a visitor gets the same kind of reception at the gates of the social institution as he gets at hotel Radisson Slavyanskaya or some supermarket because if he doesn't like the services he can always go to another supermarket.

At present there is no such incentive for the budgetary network and this is a very global and massive challenge that we should start tackling this year.

As for the overall investment conditions, I must say that we are now preparing a package of laws for the next four years. In fact, the President's agenda for each of the following years is clear, and it is known what set of legislation and what measures to improve law enforcement are needed in order to substantially transform the situation in the country.

President Putin has set the task of substantially speeding up the pace of reform compared with the previous four years. Conditions are now much more comfortable for the conduct of reform because we have a qualified majority in the Duma, our colleagues and like- thinking people who will give us the full support in implementing these reforms.

Let me tell you frankly that we do not see the Duma as an instrument that will rubberstamp the decisions prepared by the government. We see even in the early months of the new Duma that our Duma colleagues are being serious opponents and are capable of rendering serious professional help. The professional composition of this Duma -- I have already started work with several State Duma committees and I must say that the professional standard of this Duma is higher. In the previous Duma we had fairly constructive partners, but now I see a lot of highly competent professionals who are making a big contribution to drafting the laws that the government submits.

It is folly to think that all this work can be done by the government alone. It can only be done through serious cooperation with parliament. The foundations of such interaction are being laid today. Obviously, there will be serious quarrels and debates in spite of the fact that the victorious party is committed to reform and will be supportive of all the reforms that will be proposed. But anyway the differences are usually not over goals, but over means of achieving them. So, there is no doubt that serious debates in the State Duma lie ahead.

The conditions in Russia now provide a big chance to the country to make it dramatically more competitive in the world. I assure you that we will try to do all we can to take advantage of this opportunity. This is the task set by the President. We will do everything to make sure that when you cross the border into the Russian Federation you should be confident that you will meet with a friendly bureaucratic community, the business community, that you will have stable and transparent conditions, that you will always be able to get help and that the reforms that will take place in Russia, at least under the present presidential team, will always be of a liberal kind.

I know the concerns that are expressed sometimes in a rather grotesque form in the Western media, and I assure you that there are no grounds for any fears regarding a turnaround of reform in Russia. I don't think it will be possible given the present structure and the personalities in the Russian power elite. Russia, unfortunately, does not yet have profound democratic traditions, but the incumbent President, I think, will do everything to continue the course of liberal reform. I would like to stop here and I can now answer your questions.

Somers: We have questions to the Minister.

Q: I am Geoffrey Smith from Dow Jones. I'd like to know what plans if any does the government have to introduce tax amnesty in this or President Putin's second term perhaps. And secondly, you mentioned that the tax burden on oil companies is likely to be raised. In the short run this will increase rather than decrease the dependency on the Russian budget on natural resources and on prices it doesn't control itself. Within what timeframe would you expect that dependency to be offset by the broader economic growth that you hope to stimulate with this measure?

Gref: As regards tax amnesty, I do not rule it out. And I must say that we do not have immediate plans for it. We are closely studying the experience in the world and we will keep track of what is happening in Belgium, the latest country to take such a decision. We do not rule out the use of this instrument although we understand that it is not going to be a cure all or indeed very effective. As the experience of a number of countries shows, the results fall short of expectations.

Nevertheless, this is a relevant topic, we have discussed it several times and neither the government nor the President deny it. But it calls for serious preparation, the pros and cons of such measures should be carefully weighed. The measure is most effective when it is part of a comprehensive package. So, we should carefully study the possibilities of a comprehensive liberalization so as to get the maximum effect from this measure both for business and for the state.

As for the tax burden, there is no doubt that it will be eased. The documents passed last year called "Medium Term Strategy of Tax Reform" envisages an annual reduction of the tax burden by at least 1 percent of the GDP. We are committed to this plan, as witnessed by the regulatory acts that are going to be passed this year. I do not want to reveal the initiatives that are proposed. I hope that the business community will be pleased with the configuration of tax innovations that we propose. There are some arguments within the government and there is a body of opinion within the government that is in favor of a still more drastic cut of the tax burden, and there are some who take a more cautious approach.

But I think at the end of September we will be able to propose for broad discussion the proposals that will eventually be adopted.

As for the increase of the burden, I have said that the burden is to be increased only for the hydrocarbon production sector, in the first place the super profits due to high prices. One must say honestly that when we wrote the chapter on taxes on the extraction of minerals and determined the export duty, we did not expect that such high prices for oil and gas would remain for such a long time. So, perhaps these decisions should be adjusted somewhat in order to achieve a balance considering the high prices.

And there will be some new regulations regarding the tax on the mining of minerals. I have already said that in this area there will be no drastic transformations. It will be quite a soft change harmonized with the sector, which will make it possible to preserve the dynamic development of the sector. Today it is demonstrating a very good tempo of development and we are not going to discontinue the influx of investment or the investment activity in this sector.

As regards liquidating Russia's dependence on raw materials, in this area we are trying to begin taking a set of measures but it is perfectly obvious that even with a favorable scenario of the development of all these reforms, this will take long years. It is not a problem that can be solved in one or two or five years.

We can feel a change in the production of the GDP. So far it is small but if the set of measures which begins to be implemented this year is effectively completed within the coming four years then I think that within ten years we may be able to achieve a tangible change in improving the GDP structure. This would require a large number of measures to be taken, including the development of the innovative sector of the economy, the development of science and the development of processing industries, the development of infrastructure. It is thus a serious and sort of integrated problem but it will take quite many years to resolve the problem.

Q: What is the meaning of the situation in regard to the taxation of the oil sector? What is the meaning of the high oil prices?

Gref: First and foremost, I have in mind prices above 25 dollars a barrel.

Q: One of the important trends and tendencies over the last few years has been the increased transparency over ownership of Russian companies and this has had a positive effect on the investment climate. What impact, do you think, the affair over Yukos and its shareholders will have on transparency of ownership and attractiveness of the investment climate?

Gref: You know, raising the structure of ownership as also raising the transparency of power is a very important topic that probably with time should become major considerations. The topic is very comprehensive and it has to do with offshore legislation. There are problems of this kind not only in Russia but around the world. There is quite a number of laws which have already been adopted by now and are being prepared, including by us, and they assume the need for "developing" the structure of property. Without resolving the problem of affiliation, without resolving the problem of transparency of property, we will not be able to resolve a number of other issues including matters of anti-dumping legislation, the anti- monopoly legislation, the transfer price formation. We must devote time to this and in this year one of our tasks is to modernize, actually to completely revamp the anti-monopoly legislation which is in effect in Russia.

The existing model has largely already outlived its usefulness and this legislation must be updated. There the problem of transparency of the structure of ownership is one of the serious tasks and we assume that as one of the legislative requirements we have to spell out an appropriate requirement.

As regards the Yukos affair, for business any type of such shakeups exert a negative impact, and it has to do with the transparency of property although I did not make any specific study of the structure of the property of Yukos but I am judging about the structure of property based on newspaper publications only. And I can say that the structure of property is not very simple there and in this respect it may be a classical scheme employed by the Russian business with reliance on offshore structures in order to, let us say, that it would be quite difficult to understand anything in such a structure. For instance, like a triple affiliation of ownership, with beneficiary separated from the owner and to understand who owns what and in what form is quite difficult.

But I believe that it is just a stage in he development of business, it is a way of hedging the risks by Russian entrepreneurs. Many entrepreneurs have been and are using this kind of scheme up till now. Of course, it is a mutual process when we must understand the substance of this new stage of the economic development in Russia and we must establish the necessary safeguards so as to enable business to show to the maximum the structure of ownership of all or at least of the key companies.

Q: American Institute of Business and Economics. Mr. Gref, since 1998 Russia has been trying to adopt international accounting standards for its financial accounting system. Currently about 22 of the roughly 43 international accounting standards have been adopted either partially or wholly. When do you expect that the Russian accounting system will fully adopt international accounting standards in Russia? Thank you.

Gref: It is a very important question and I hope that we will provide the answer to it in the near future because right at the next government meeting in February we have this question on the agenda, it is about Russia's transition to the international accounting standards. But in this case one has to understand the entire range of problems that has developed in international practice. It is the range of problems related to the universal application of international standards, the standards used today by the United States and of course, the situation is even more complicated in Russia where today the problem is very serious in virtue of the fact that in the course of previous years and reforms we have developed actually several independent forms of accounting and reporting. We have accounting and reporting, we have tax accounting and reporting, we have statistical accounting and we have financial accounting. We also have the so-called the most correct and the most "truthful" accounting conducted by enterprises for themselves. As a rule such accounting is not forwarded to tax inspectors, so this is probably the most honest economy which in the final analysis should provide the foundation for real standards of account at enterprise level and our task is to establish a single accounting system.

Accounting should be one and very simple. And the form of accounting -- the accounting, the statistical, the tax related -- should flow out of this accounting and should be easily transformable. This is our domestic task and it still requires time to be formulated and we need to spell out the conceptual approaches and changes in the appropriate regulatory base. Only after this shall we be able to finally introduce international standards in their full volume. In my opinion this task will not be quickly resolved. One can introduce standards in the course of several years but the final transition -- their stage-by-stage, smooth transition -- first in probably large public companies, then in smaller ones, and then complete introduction -- I think will take time and I would not like to make predictions concerning deadlines but surely this will take a few years. I don't think it will be possible to resolve the task in 2005, 2006 or even 2007.

Nevertheless, we remain committed to the principles that I presented. There is the stage-by-stage resolving of tasks aimed at implementing that objective and I think that we will tackle the task in a matter of several years.

Q: Ivanov, the company Kaskad. From the beginning of this year prices in stores have gone up quite substantially despite the abolition of the sales tax and the strengthening of the ruble. What level of inflation do you expect by the end of this year and what measures is the government taking to reduce inflation?

Gref: You know, if you are a representative of the business community, then it is strange for me to hear you stating that they have lowered the tax but the prices have remained unchanged. We are living in a market economy, my colleagues. And the level of prices depends on the equilibrium between supply and demand. If we did not lower it, the prices would have increased even more. Our companies would not have the investment potential. Then let us not discuss the sales tax or the VAT and in the final analysis we lowered it not by five but by seven percent. But if we take this road, then we are building something else. We have lowered taxes by 7 percent and so you lower your prices by 7 percent. Indeed, despite everything, quite a number of companies decided to lower the prices, not only trading companies but also companies turning out industrial products and so on.

We do not expect a direct correlation: lower taxes -- lower prices. We believe that at the end of the day it is the accumulated effects in the economy, a change in the behavior of investors, internal investors and the enterprises active on our market. Eventually, the reduction of taxes will yield an effect. That is obvious.

As for the rate of inflation, we hope to keep it within ten percent on an annualized basis. The results for January are not yet in but you are quite right that prices jumped in January due to a number of factors, including the government's measures aimed at stabilizing inflation in the country. Specifically, last year a law was passed at the initiative of some deputies and the government, indeed one of the initiators of the law is sitting in this room, Zubov Valery Mikhailovich -- and it was decided that the rates for housing and utilities services should not change more often than once a year. That applied to all the levels of government.

And of course the local authorities and the subjects of the Federation were too keen to cushion themselves. They decided that from January 1 they won't have the same opportunities than in the previous years and so they raised tariffs in advance. And now, after queries from the deputies and some non-governmental organizations, the government is looking at the situation in the regions to see if the subjects of the Federation have raised the tariffs above the agreed maximum. If such breaches are discovered, undoubtedly we will take steps to challenge these decisions and to have them canceled.

Long-term planning of the tariffs of natural monopolies, this year we are adopting a three-year financial plan and there all the investors can see how the prices of the services of natural monopolies will be changing over the three years. For the first time the growth of tariffs will not exceed the projected rate of inflation.

And the second set of measures has to do with monetary instruments. That implies day-to-day concern of the government and day-to-day cooperation between the government and the Central Bank, the planning of the money supply to the economy and an attempt to reach the limits planned for the following year.

Somers: I am afraid we have to end the question and answer due to constraints of scheduling and Minister Gref's schedule. Thank you very much for coming. We greatly appreciate it.

It's now my pleasure to introduce the dean of Russian economists, Professor Yasin, who really needs no introduction. I would like to say, to remind you that he was Minister of Economy under the Yeltsin administration and forecast pretty accurately and publicly what was going to happen in 1998. And perhaps that's why he was asked to leave in 1997 and lost his Ministry of Economy and was given the title of Minister without Portfolio. But he certainly had 1998 in his sights. He's been a leader on behalf of both academia and the business community in moving reform forward. He is one of the most respected economists in the world. I'd now like to ask to the podium Professor Yasin.

Yasin: Dear friends. It is a great honor for me to be able to speak to you, especially since I feel myself to be almost your host because the Expert Institute of the Russian Union of Industrialists and Entrepreneurs jointly with the American Chamber of Commerce have been preparing reports for your annual meetings for the fifth year in a row. To us this is a pleasant duty and a tradition which we gladly follow.

Today I am doubly pleased to be speaking to you because I can report to you that by comparison with what we reported to you five years ago, the Russian Federation has chalked up considerable achievements and looking back we can say that a great deal has been achieved during the past years. Having said that, of course we would like to have achieved more. Anyway, Mr. Gref has given me a small window of opportunity to cite a few figures regarding the results of 2003 and I will take advantage of that opportunity because these figures indicate outstanding achievements.

In 2003 the rate of economic growth in Russia was 7 percent of the GDP, that's one of the highest indicators in the world matched, I think, only by the United States and China. With us, it is not the highest result. A still more impressive result was achieved in 2000. Let me remind you that prior to 1998 we promised a breakthrough every year and for six years we had negative growth, a falling production and declining economy.

And that is not all. You look at any indicator that characterizes the development of the Russian Federation in 2003 you will see positive results. I would say both qualitative and quantitative. As regards quantitative indicators, I'll cite just a few figures. Investments in the basic assets have increased by about 12 percent, real disposable incomes of the population -- as Labor Minister Mr. Pochinok reported to the President recently -- have increased by 14 percent.

And I would like to say that it is an extremely important factor that the high rate of growth is achieved not only or largely in the sectors that produce raw materials. That sector is growing fast too, especially the oil industry, much less the gas industry and other departments of that sector. The highest growth is registered by construction (about 14 percent) followed by trade, machine-building (8-9 percent) and these sectors are geared either to the internal market or, if it is the external market, these are sectors that export finished products and not raw materials.

I am saying this because there is a widespread sense, and it is not without grounds, that all the achievements of the Russian economy are due to the high oil prices. That is true up to a point. It is true that 2003 was especially favorable for us in terms of prices because the problems that arose around Iraq helped to keep the oil prices high. But I would also like to say that the higher the oil prices the less the Russian economy depends on the oil and gas sector. It may sound odd, but it is a fact. There is an explanation to it.

The influx of revenue is to a large extent reinvested in the Russian economy and increased amounts of capital gives a boost to other sectors as well. In any case, the proportions of growth are slowly changing, and I hope in the future they will be changing more rapidly so as to make Russia less dependent on raw materials. True, we do not know what the impact may be on the development of the Russian economy of a possible drop in the oil prices. We are worried because we know that some day it may happen. But so far, this has not happened. But in any case I do not give much credence to the apocalyptic forecasts that are being made on that score.

What adds to my confidence is that our analysis confirms that the higher rate of the development of the Russian economy is due not only or largely to high oil prices, but due to the reforms that have been implemented beginning from the 1990s are at last yielding results. We have a powerful market sector in the Russian economy, strong companies. I would not compare them to the strongest American companies but at any rate, in terms of the quality of management, in terms of organization and the ability to work on the market, many of our companies have already mastered the experience and they can work successfully. Strictly speaking, they are the engines of development of the Russian economy in recent years.

I would like to say that this does not mean that Russia has no problems. The problems are quite diverse and even the oil prices for us are a problem because they lead to the Dutch disease, to a higher inflation or rather to the difficulties of containing the inflation. In recent weeks there has occurred a sharp increase in the gold and currency reserves of Russia. The reserves have already surpassed the figure of 80 billion dollars and this process continues which means that the Central Bank is forced to yield to the pressure of the influx of currency receipts into the country and at the same time it faces the need of increasing the ruble supply and thus an increase in inflation.

Now in January we have again seen a leap in inflation. Everybody thinks that this is something usual as it used to be the case every year but in reality I would like to tell you that in previous years the inflation leap in January was largely related to expenditures that have been deferred during the year. This was the policy of the Finance Ministry and the policy of many departments who get budget allocations. But last year special efforts were made. For a whole year the Finance Ministry did not defer allocations toward the end of the year but rather delivered on them strictly according to schedule. It required the recipients from the budget that they should rythmically utilize appropriate allocations.

Such instructions were implemented but the leap was there. I think that this largely has to do with precisely the excessive money supply. At the same time the economy is absorbing the extra financial resources and I simply would like to draw your attention to one circumstance, namely, that last year in Russia the money supply increased 50 percent and inflation went up 12 percent. The difference is 38 percent and it is the financial resources that had been absorbed by the economy which continues to need the circulating assets, the need for credits and the need for investments, and the fact that this process of "absorption" already goes into its third year and even in 2003 it turned out to be more than in 2002 is an important proof that the economy is increasingly prepared to receive capital. This is because in the past we always had apprehensions: let us assume that our foreign colleagues wish to invest in Russia much more. I have in mind not so much direct investment as portfolio investments and then we will have a problem on our hands.

I assume that so far this is not happening, rather on the contrary, we see the tendency that the receptiveness of the Russian economy in regard to investments is increasing and in my opinion this is quite a positive phenomenon. Although, as always, if I mentioned only a plus and failed to mention a minus, you would not believe me and meaning of the minus is that the risks in the case of our banking system have again begun to grow and this has to do with the fact that assets grow much faster than capitalization. This is also the truth, this is the problems which we are facing today, and I simply want to draw your attention to the fact that the character and the scale of the problems is quite different from the one that we faced five or six years ago.

I think it is quite important to note the fact that in 2003 and over the past four years enormous work has been carried out to promote a set of economic reforms. I must say that this is work of colossal importance. I am glad that Mr. Gref is gone and I can say a few warm words about him, because in his presence I would not do it so that he would not give himself airs. In reality he is one of those people who have made a lot of efforts to keep up the pace of reforms. And I must say that in my opinion opposition is growing and the further we go, the more difficult it becomes to introduce these necessary transformations which aim at making Russia a free and market democracy, will be needed for quite a lengthy period to come. This is a brief overview of the accomplishments and difficulties we have had in the pursuit of reforms.

I asked 150 most experienced Russian economists and experts, representatives of the business community to speak out about their notions concerning the successes of the Russian reforms for the past four years. I have received answers from them which indicate that compared with expectations, the headway made by reforms is about 20 percent. All these are conventionalities that are inevitable when you ask experts for their opinions. Nevertheless, this must not upset us excessively because the pursuit of reforms always proceeds with greater difficulty than it is possible to assume or than we would like them to, but on the other hand, I was already talking about some resistance.

By the types of reform, the first place in terms of the progress made belongs to the tax reform and so its headway compared with expectations is about 50 percent and it is the best result. Among other reforms I would mention, or rather not I would but as the experts said, I would mention the legislation on debureaucratizing or deregulation of the economy, the reform of the electrical power sector, the pension reform and the reform of education. I must say that indeed in these areas quite serious accomplishments have been scored. Sometimes they stop at the point when the appropriate legislation needs to be adopted. For instance, i can mention in this connection the reform of the electrical power sector or also debureaucratizing because laws have been passed but the effect is not so great but in other areas, say in pension reform, the situation is this: I will say that we have an acute and critical view of our own performance. II think it is good.

Yesterday or the day before I read in a newspaper the following headline: The failure of the pension reform in Russia. Considering that I am lucky in the sense that I know the current situation in regard to that, I can say that this is one of the few reforms where things have got outside the framework of drafting and approval of appropriate legislation and there is real headway. The argument is over the question of the way in which future pensioners will dispose of the pension accumulations that have begun to come to the Pension Fund from 2002. The accumulated amounts themselves are very small, there are many problems related to managing them and it is necessary to instill in people the sense that they are now not simply future pensioners but that they are investors. This amounts to a change in psychology. And that is why when people get indignant or rather specialists from managing companies or investment funds get indignant over why private companies have received only 5 percent of the saving amount of the pension. But on the other hand, this is only the beginning and the fact that over previous years a very serious infrastructure has been set in place for a systematic performance of the pension system, regard this as an important accomplishment.

If Mr. Zurabov were here, chairman of our Pension Fund, I would criticize him because there are reasons for which he has to be criticized, but since he is not here now, I can say that in my view there are certain definite accomplishments here. Same is true of education. Recently in our newspapers you could read that Moscow in 2004 will not organize a single state examination. The impression is created that the Moscow authorities are displaying caution which spells trouble for Moscow's schoolchildren because for a second straight year they will be in a bad situation. People from the provinces will be coming and entering the higher education establishment of the capital on the basis of a single state examination. I think that the Moscow schoolchildren can thank the Moscow government, Ms. Kezina and others for the fact that again they were helped to lag behind. I assume that at the same time one would be justified in saying that the legislation adopted quite a long time ago, back in 1992, and which is opening the road for itself with great difficulty because of the resistance put up by mostly the leaders of many higher education establishments, it is precisely that case when officials turn out to be more progressive, I mean the Ministry of Education, the minister and so on for in the final analysis it is by their efforts that the single state examination is being adopted in 48 constituent members of the Federation.

I believe that this figure in itself indicates that the situation has gone outside the experiment and is becoming daily practice. Is this important or not important? Dear friends, this is important. Mr. Gref, speaking here, said that our task is to get our budget institutions to operate in the same way as elsewhere, that is, they get money for services rendered even if the money comes from the state, but not for occupying premises and maintaining a certain staff.

So, following the single state examination, it is a step in the transition to a system of financing on the basis of state financial obligations that implements the principle of "money following the student". This is a fundamental point to bear in mind.

But I should also say that the situation is not so good in other areas. For example, while there has been considerable progress in reforming the power industry, things are at a standstill with regard to the gas industry. In the railway transport what happened was just a separation of Russian Railways and the Ministry of Railways. This was necessary, but it cannot be seen as a reform. I must say that the possibilities of reforming the railway transport on the basis of the general idea of identifying a competitive sector are rather dubious in Russia. There are very serious problems there and unfortunately no positive international experience is available as far as railway transport is concerned. Even if it exists, it is premised on conditions that do not obtain in Russia.

Things are at a standstill in reforming the housing and utilities sector. I expect that in future it will be one of the most difficult issues. I believe that the delay of reforms in this field is basically due to the low level of incomes in Russia, especially in the public sector, as well as the low level of pensions so that prices for services are being held down and this delays the transition of this sector to the market economy.

I was involved in preparing a report which shows that this problem is capable of solution, but so far no progress can be reported in this area.

I would also like to say that we have over the past years seen considerable progress in the banking sector and in the financial markets. Suffice it to say that capitalization of banks has grown substantially, almost trebled in the past years, the assets have grown even more dramatically, so much so that it is now giving cause for some concern. There was a time when we discussed banking reform very vigorously. By the way, this is one of the conditions set by the international financial institutions and the rating agencies. I recently made a special study of the changes in the banking sector that occurred during the past years and I think that reforms are still necessary, but the banking sector has proved to be able to restructure itself without serious state interference.

Some efforts to improve supervision and clean up the bank balances of assets that should not be there are being exerted by the Bank of Russia. However, substantial changes in this area can be noted.

I would also like to say that Russian corporations and companies have exhibited a highly positive trend in increasing transparency, raising the level of corporate culture and corporate governance, the adoption of higher standards of corporate ethics. I would like to draw your attention to the international accounting standards. I have already told Mr. Gref that he is being misinformed about the state of affairs there. He has suggested that this is a very complicated problem that will take years to solve.

I think it is a complicated problem only because several officials in the ministries and agencies who are interested in the preservation of the status quo and who have the backing of the conservative-minded Russian accountants are trying to hold these reforms back.

I must say that Russian business has made important efforts to move forward in this area. It has undertaken to set up an independent fund that could evolve into a self-regulating organization of professional accountants. We have an institute of professional accountants under the Finance Ministry. It is officially independent but actually it reports to the Finance Ministry and it resists change.

I must say that the several years that Mr. Gref has referred to have already passed. Because in 1997 I was the head of the interagency commission on accounting reform and the same problems were on the agenda. And to this day the position of the Finance Ministry is that in Russia everything is a little different and that we need national accounting standards that are compatible with international accounting standards. But elsewhere in the world even the United States has agreed to have international and not American accounting standards. It is high time to move forward in this area. And I will try to explain to Mr. Gref that in this area too he should display perseverance or else bureaucrats will be difficult to prevail upon.

I would also like to say that in 2003 the conflict between business and the authorities has erupted into the open. I would rather say that it is a conflict between business and the bureaucracy as highlighted by the Yukos case. I think one should uphold legality and problems should be settled in a law court and not through armed twisting or with money. But we should bear in mind that cooperation between business and the authorities is a condition for sustained economic development.

In my view, we are in a crisis situation. The question was asked here about amnesty. I would urge the government to move quickly on this issue. My reasons for this are as follows. Russian capitalism is very young, Russian business is very young. And the history of its emergence has been marred by some "birth traumas". It has many features that are unacceptable in more mature capitalist countries. Nevertheless, it is fairly aggressive and robust and I think that at a certain stage some shortcomings of a young organism can be forgiven.

We see that the time has come to draw a line under the future. I understand that Russia faces very serious challenges of social inequalities, poverty and the glaring contradiction between the handful of wealthy people and the poor masses. But such contradictions cannot be solved by expropriating the riches from the wealthy and dividing them up equally. They can only be solved through promoting competition and economic development and not on the basis of social charity. If we follow that path, economic development itself would suffer great damage.

I think these circumstances must be taken into account and solutions should be sought. At present we seem to be saying, "Yukos is one-off case, nothing like it will happen in future and things will develop smoothly like they did before the Yukos case." But one must have an open mind. The crisis has not been resolved. It has just been covered with tree branches. Sooner or later it will have to be resolved. I hope it will be happily resolved after the presidential election.

I don't want to trespass on your time and let me just say that the outlook for the Russian economy is quite good. The basis for this was laid in the past several years thanks to the persistence of the President and the government in implementing liberal economic reform. I also hope that in the coming years these reforms will be backed up by the policy of democratization which is becoming a key issue. You see, we have approached a point when further democratization becomes an indispensable condition for the continuation of reforms.

I could cite the administrative reform as an example. We expect improved performance from the administrative apparatus. And this makes sense because to make the state apparatus more effective is an indispensable condition for eradicating corruption and running the country more efficiently. But it is also clear that bureaucrats themselves cannot be trusted to control their own work. Supervision over the administrative apparatus should be the business of public democratic institutions, including parliament, political parties and so on, as we know well from Western experience.

I can say that I am not against a "controlled democracy", but only up to a point because I understand that Russia is a difficult country, it does not have a mature civil society. There are many things which we are not yet ready for, but attempts to build up a vertical power structure and manipulate or control all social processes have gone too far and it is time to stop. By the way, it could provide a good basis for resolving the conflict between business and the authorities.

If business is reduced to a lowly position, the state will not grow stronger as a result. I repeat, I think the problems we face are problems of growth, of forward movement and we will solve these problems step by step.

I am also deeply convinced that there is a good and clear outlook for Russian-American business cooperation. I think we are all grateful to the United States for the position it has already indicated regarding the admission of Russia to the World Trade Organization. I think important changes are happening in the position on the issue of the European Union. Mr. Gref is fresh back from Brussels and he brought some good news. Time will tell, but I hope that in 2004 or at the latest in 2005 Russia will join the WTO.

The key question for us is competitiveness, the competitiveness of Russian goods and services and the competitiveness of the country. That would determine the Russian position among civilized countries in the 21st century. It's a serious problem, a far more serious problem I would say than those we have had to solve up until now. Because we are talking about overcoming the legacy of the Soviet past and even the legacy of feudalism which outstayed its welcome in Russian history, and about major changes in mentality. Nevertheless, these tasks will have to be confronted and we believe that our partner and ally, the United States, will be by our side in this difficult work.

Thank you.