#18 - JRL 9169 - JRL Home
PRESS CONFERENCE WITH PRESIDENTIAL ECONOMIC ADVISER ANDREI ILLARIONOV ALEXANDER HOUSE, JUNE 2, 2005
Source: www.fednews.ru

Moderator (Pavlovsky): Ladies and gentlemen, good afternoon. We are starting, almost on time, we are starting a press conference with Andrei Illarionov, the President's economic aide. True, I have two variants of the title. A brief one: Russia's Economic Diseases, and a longer one: Russia's Economic Diseases and Ways to Treat Them. Andrei Nikolayevich, shall we do it with or without treatment?

Illarionov: Let us also add symptoms, diagnostics and analysis.

Moderator: You are welcome, Andrei Nikolayevich. We are waiting impatiently.

Illarionov: Good afternoon, dear colleagues. Really, as it has been stated already, the topic of our meeting today is Russia's economic diseases. The choice of this topic, which you may find strange somewhat or somewhat unexpected, was prompted by the fact that between the economy as a sphere of activities and humans as an organism, there is much in common. There is also a lot in common between economics and medicine as spheres of research. In fact, there also are parallels in our language and each of us has made use of that many times, when commenting on certain economic events, using medical terms, while sometimes not even paying attention to that. We say sometimes: the economy is ill, the economy recovers, the temperature of the economy is high, the economy is in paralysis, and there are lots of other medical terms used to describe the state of an economic body. The reason is clear enough, because medicine is a by far more advanced sphere of knowledge, better developed than economics which is a relatively new sphere of knowledge. Therefore, to some extent, the research potential that has been accumulated by other spheres of studies, including medicine, has been used in economics.

As we are going to speak about the economy from the medical point of view, to a certain measure, perhaps there will emerge quite a lot of new terms or those looking new at first sight, those of medical origin. Therefore, those who find it hard to deal with anatomy or physiology, it is not too late to leave. Actually, it will be possible to do this later. But like Surgeon General, I have to warn you that certain terms may be somewhat unexpected for meetings of that kind.

So, diseases. Naturally, we will focus, we will spend the bulk of time discussing Russian diseases, even though many of diseases we are going to mention are not purely Russian diseases. We will speak about economic diseases first and foremost, even though some of those diseases also apply to other spheres, not just the economy, which is absolutely clear now and will be even more clear as we move ahead.

As diseases means pathologies, and we will analyze pathologies, one has to have at least some general idea of what is not a pathology, what is normal development. This is a separate, very interesting sphere which it is impossible to discuss in detail during our meeting today, but I can give a rough description. It is that normal development, or natural development, of the economy is development which is characteristic of at least a substantial number of patients, showing statistical probability of behavior. And deviations from that norm, from that fashion, by the way, can belong to something different than pathology, if they are not substantial. But if deviations are substantial and strongly influence the behavior of an economic body, we will describe it as pathology.

Like pathology in a human body, there may be different pathologies among economic pathologies. For instance, in a human body there may be cardiovascular diseases. In the economic sphere, something similar happens to diseases in the financial system, because the financial system performs functions similar to those performed by the blood circulation system in a human body. There are locomotor apparatus diseases. In the economic sphere, similar diseases are described as structural problems. They emerge when some or other parts of the economy have been distorted and structural reform is required or, in other words, surgery is required to mend inborn or acquired deviations. There are digestion diseases in a human body, and there may be similar problems in an economic body. There are respiratory diseases in a human body, and something similar may happen in the economy. Perhaps, in the economy the analogy is the energy sector, because it provides energy to the economy like the respiratory system supplies oxygen to a human body.

Naturally, there are lots of nervous system diseases, mental diseases, diseases related to other systems in the body. So, to get some idea of that, one may take a look in the medical encyclopedia, a doctor's reference book. So, for a human body and an economic body, the set of diseases is similar, as it turns out.

There are various diseases. As I have said already, diseases can be, well, perhaps not inborn, but inherited from the previous epochs, governments, regimes. And there can be acquired diseases. This can be acquired by various means, as a result of infections from other sources and they may develop inside an economic body as a result of an improper mode of life, improper mode of behavior, they may develop, build up and eventually ruin the body.

Naturally, if there is infection, there should be relevant immunity against this sort of infections, but if infections continue, it is possible to say that there is an immunodeficiency syndrome caused by some or other diseases, especially given that they occur quite often. For example, for the Russian economy such a well-known immunodeficiency syndrome is immunodeficiency related to interventionism, distribution, populism. Despite 70 years of inoculation, which should have worked, the Russian economy and the Russian economic and political elites prove strongly vulnerable to those infections and they readily catch related viruses and spread them across the Russian economy's body.

There are lots of other diseases, pathologies, syndromes, and where possible, we may touch upon some of them, but as we are discussing diseases, we have at least three main spheres of medicine studying those diseases, those dealing with, first, symptoms, with monitoring of economic behavior, deviations from the norm, second, their diagnostics, primarily with the help of statistics and economic analysis, diagnosing some or other diseases and finally, issuing recommendations concerned their treatment, which may belong to homeopathy, therapeutics or surgery.

As we are approaching the treatment section, naturally, a question arises: who performs this treatment? In the economy, those who are described as economists act as doctors. And like among doctors, there are those belonging to various schools among economists, they also differ by their skills and the consequences of the moves they take with respect to the economic body, to the patient. Naturally, there are specialists of various levels, differing in knowledge quality, better and worse, there are charlatans, there are witch doctors. Still, the public which does not know much about this sphere of thought describes them all as economists, and they are sometimes surprised: how could this happen, if economists advised this or that?

As we know, anything happens in our usual life. Various doctors prescribe various treatment. Sometimes they prescribe treatment of diseases which do not actually exist. But sometimes they just want to get this particular job, especially if a patient is wealthy enough. Sometimes medicines are prescribed which are not needed. This is sometimes done accidentally, in other cases this is done intentionally. It is all like in usual life.

There is a well-known school of economic doctors known as the Procrustean school, which treats economic diseases proceeding from the one-model-for-all principle. Therefore, no matter what patient they have, they tend to extend or cut off certain organs in the belief that this way they bring the patient closer to the norm, which may be reflected in some statistical data. I specially mentioned this as an announcement which will perhaps make it easier for us to move ahead to familiarize you with problems we may focus on in more detail.

After this introduction, perhaps we can pass on directly to the presentation that I hope will help us. While it is waking up, I hope equipment will be more cooperative this time, I would like to remind you of the history of the disease, or actually of the diseases of the Russian economy or rather of what became the Russian economy.

At the end of the 1980s and at the beginning of the 1990s, when the mass public opinion was riveted to the state of the Soviet economy, which later became the Russian economy, there was practically a consensus among those who called themselves economists that the Soviet economy was suffering from serious structural problems connected first of all with the absolute dominance of state ownership and the need to develop private ownership and market institutions. So there was a consensus among those who dealt with the Russian economy at that time about the need for structural reforms, i.e. for surgery to change the structure of ownership, create and develop new institutes.

Practically all schools were unanimous on that. We all remember the 500 Days Program, prepared by Grigory Yavlinsky and his team. It focused on structural reforms. At the same time it transpired that in addition to hard structural reforms the Soviet economy at the end of the 1980s and the beginning of the 1990s had what I would call maimed organs that did not allow the economy to develop rapidly. As you remember, at that time the growth rate was negative. And even when it was positive at the beginning of the 1980s and even throughout the entire post-war period, it was much lower than economic growth rates in market economies.

So it was clear that structural peculiarities of the Soviet/Russian economy did not allow it to develop as rapidly as market economies did. And therefore it was necessary to carry out so- called structural reforms. However this set of diseases was compounded by serious financial problems, such as fiscal imbalances, a large budget deficit, open and suppressed inflation. And this required relevant measures in the field of so-called macroeconomic or financial stabilization. We may as well call it cardiovascular diseases that impeded surgery in terms of structural reforms. Besides the treatment of these diseases required immeasurably less time than structural reforms. This is why a number of economy specialists advised the government to focus on balancing out finance.

There was also another problem because economic agents did not have the necessary freedom of action. In other words, it was necessary to start economic liberalization. To put it differently, the economy we had in 1991 not only suffered from structural reforms and financial imbalances, but it was also bound by different restrictions. So that's the kind of patient we had on the operating table at that time.

What happened after that is well known. The Russian economy was partly liberalized. Macroeconomic stabilization, which normally doesn't take more than six months, took at least seven years, actually even eight years. And structural reforms, or shall I call it surgical reforms, that were carried out sporadically, and often in the wrong direction, still remain unfinished. So the Russian economy that we have now has elements of the badly treated diseases that have been around since the end of the 1980s and the beginning of the 1990s. However during this time new diseases have developed. I will describe them every briefly now.

One of these diseases -- we can use both medical and non- medical terminology -- is a violation of proportions. For example, we can see it by comparing fundamental economic and other indicators between Russia and any other two countries, with which some representatives of the Russian political elite like to compare Russia. For example, the US and China. While they are more or less comparable in terms of territory and population, we are seriously lagging behind the other two countries in terms of GDP. And this may provide some reasons to speak about some elements of dwarfism. If we compare Russia to other countries, Russia ranks eleventh in terms of GDP and buying capacity parity among other countries, and it certainly doesn't occupy the place to which Russian political elites became accustomed.

Another well-known disease, which has been discussed so much lately and which is continuing to be analyzed and studied by many people, is a disease that medicine calls hypogenesia. The name is derived from two Greek words "genesis" which means development, and "hypo" which means deficiency. In other words it's deficient development, low economic growth rates in Russia. You can see it in this slide. Per capita GDP in Russia is shown as a percentage of the US in the last 120 years. There were several periods at the end of the 19th century and some other periods when Russia's GDP was slightly more than 40 percent. Currently it is below 24 percent. So even in terms of relevant indicators, it is almost half of what Russia had during periods of time.

Based on these data, a number of economic doctors recommend high economic growth rates, at least in order to restore the previous position. But at the same time there are other doctors who advise against developing so rapidly because, as I say, it is either impossible or not necessary or because Russia's backwardness, including economic backwardness, was, is and always be.

Another illustration of hypogenesia, i.e. lack of development, would be the changing place of Russia among the CIS countries in the last six years from 1999 to 2005. As you can see, in 1999 Russia ranked third among CIS countries in terms of GDP growth, it was fourth in 2000, ninth in 2001, tenth in 2002, it moved slightly back up to eighth place in 2003, but in 2004 we finally did what we had failed to do in the preceding years: we finally took honorable twelfth place among the twelve CIS countries. In the first quarter of 2005, we moved up from 12th place to 11th place. Actually we didn't do it ourselves. We owe it to Kyrgyzstan and the events that happened in that country and that slowed down economic growth in Kyrgyzstan considerably. As a result, Kyrgyzstan moved down to the bottom.

A lot has been said lately about the situation in the oil sector. There are such terms as the Dutch Disease. Indeed, it is one of the most serious diseases that has afflicted the Russian economy. But there were periods when the Russian economy did not have this Dutch Disease. For example in the 1990s and even at the very beginning of the current five-year period, despite the oil and gas sector, there were no signs, or as medics say symptoms, of the Dutch Disease. The phenomenon that was registered back then could be described as an organic development both of the oil industry and of the entire Russian economy.

This chart shows oil extraction dynamics in millions of barrels a day in Russia in the last 14 years. After a long decline that ended in 1998-1999, there began a rapid growth of oil extraction that amounted to more than 60 percent over these years. There was a comparable increase in investment. The export of oil and petrol products from Russia grew considerably, two and a half times. As a result of the rapid development of the oil sector in Russia, Russia's position in the international oil markets changed substantially. While through most of the 1990s Russia's share in world oil extraction and export was falling, which did not raise any objections from the principal oil producers and exporters from OPEC, but the year 1999 was marked by the beginning of the rapid growth of Russian indicators, both absolute and relative. During a number of periods Russia was the biggest oil producers and extracted more oil than even Saudi Arabia did. But of course not everybody liked that.

In the last couple of years, I'd say in the last four years, we have had what is well known as the Dutch Disease. It's not quite fair of course. I mean it may be fair because the disease was first described in Holland in the 1960th when gas fields were discovered in the Dutch sea shelf, and gas revenue boosted the gulden's exchange value, led to structural changes and diverted funds from the processing industry to gas extraction. And since this was first described in Holland, the disease was called the Dutch Disease. Even though a dozen of countries have suffered from this disease since then, the name stays, although it could be called something different.

How did it happen in Russia? Before 1998-1999, Russian export of oil and petrol products was quite moderate and ranged from 10 to 15-16 billion dollars a year, with a minimal level in 1998 when it was slightly above $10 billion. In the last six years, revenue from the export of Russian oil and petrol products increased almost sixfold and reached more than $58 billion last year. It's not a secret that this figure will be even bigger this year. If we count in revenues from the sale of gas, the figure will be still higher.

Because of the growing inflow of currency into the country, the monetary indicators, money supply keep up a high pace of growth. As a result, the rate of inflation is high and we have even lately seen an acceleration of inflation.

You see that the consumer prices have been growing over the past few months at an annualized rate of 13.6-13.7 percent. Wholesale prices during the year have remained at a level over 20 percent on an annualized basis. This is to a large extent the result of the Dutch disease, but not only of the Dutch disease.

As a result of high inflation, the real currency rate is rocketing, which means a higher cost of doing business, production costs in the Russian economy. And you see that after the 1998 devaluation when the real currency exchange rate of the ruble plummeted, the Russian economy has managed to maintain a fairly high rate of economic growth, and then the real currency exchange rate increased rapidly. In the first four months of this year, in January- April 2005 when the real currency exchange rate in fact matched the real effective currency exchange rate in the period from July 1995 through August 1998, the period of the so-called currency corridor.

As we remember, the period of the currency corridor, or peg, meant that most Russian enterprises were unable to expand. It was a period of economic depression caused, above all, by the overvalued national currency, real currency exchange rate.

We are moving quickly to the parameters of 1995-1998. How the real exchange rate impacts changes in the structure of the economy is illustrated by this graph. You see, the close correlation between the real currency exchange rate and the share of the oil industry, the oil extracting industry in total industrial output. This is not surprising because rising real costs of conducting business in the country does not, in fact, have a negative impact only on several sectors, those the price of whose products have a large share of rent obtained, among other things through international redistribution of resources.

All or nearly all the other sectors, especially the industries the price of whose products does not contain such rent, naturally have been shrinking. So, every success in raising the real currency exchange rate spells corresponding changes in economic structure, the structure of industrial production in favor of oil and at the expense of the sectors which are seen as processing industries.

But, naturally, not only change in the structure of industry, not only the overall economic slowdown caused by the Dutch disease, these are not the only consequences. There are other consequences.

Basically, speaking about the Dutch disease, if I were to give it an economic definition, or rather a medical definition, I would compare the Dutch disease with obesity, a tumor and neurosis occurring at the same time.

Because of a substantial inflow of foreign currency it is accumulated in the economy, boosts the real currency rate and slows down growth, exactly like obesity in the human organism slows down a number of vital functions. And a tumor is a fairly accurate description of what is happening in at least one part of the economy, because a tumor is a state of rapid proliferation, rapid division of cells as a result of which these cells attract a huge amount of resources from other human organs. If neglected, this process may cause degradation of the whole organism and even death. Therefore, in medical practice tumors are usually treated by eliminating the sick places not to contaminate the rest of the organism.

The same recommendations hold for the economy. Such an insulator in the economy is the mechanism of the Stabilization Fund which accumulates surplus resources, the very excess infected cells of the economic tumor and prevents these cells from penetrating other organs of the economy. If the doctors take other actions to destroy the Stabilization Fund by making all sorts of little or not so little holes in it and even big gaps, and the resources of the Stabilization Fund are invested in the rest of the economy, this can be compared to the spread of infective tumor cells throughout the human organism.

In addition, we suffer from infantilism as an inevitable consequence of the Dutch disease, or degradation of the quality of economic policy is -- and the change in the federal budget revenue is an illustration because in the last five years it increased from less than 25 billion dollars to almost 120 billion dollars. This year the federal budget revenue will grow even more. Today the government is discussing changes in the budget as a result of which both the revenue and expenditure are changing.

The increase of the revenue part of the federal budget naturally creates an array of illusions which in medical parlance is called giddiness, that's when success goes to your head, including success for which you can claim no credit. And then you get a feeling that anything goes and, moreover, regardless of what you do, you can get away with it, including the mistakes and setbacks in the pursuit of economic policy. One eloquent proof of the deterioration of the quality of the economic policy is the chart that shows the dynamics of the quality of economic policy in recent times. In the last four years the quality of economic policy has steadily deteriorated to become a negative value in 2004.

Another illustration of the declining quality of economic policy is the change in the trends of export of capital from the Russian Federation. In other words, investments in foreign assets in the last three years more than trebled from 10 to nearly 33 billion dollars. Tentative data for the first quarter of 2005 indicate that in the first quarter export amounted to 19 billion dollars, a marked increase on the indicators of the first quarter of 2004. This attests to the accelerating process of degradation of economic policy.

Naturally, a slowdown of the rate of economic growth and structural changes prompt an urge to do something about it. And some economics doctors recommend drastic surgery in the shape of an active government structural policy, by increasing taxation of extractive industries, in particular the oil industry, so as to use these assets to finance other sectors, including the manufacturing industries. The expectation is that such a redistribution of assets from some organs to others would have a positive impact.

We see that the policy pursued by the Russian authorities -- especially by the Ministry for Taxes, the Prosecutor General's Office and the Ministry of Economic Development -- we see the results of such surgery. The average rate of growth of oil extraction dropped from 8.5 percent to 3.6 percent. The manufacturing industry has not grown and continues to decline. Total industrial output, its rate of growth, has dropped by almost half and the rate of GDP growth dropped by a third. One can see that incompetent surgical intervention slows down economic growth and does not appreciably improve the structure of the national economy from any point of view.

Against this background, against the background of progressive Dutch disease, which, as you well know, is not being treated, but is getting worse, including due to the increase of the cutoff value of the Stabilization Fund by creating a so-called investment fund at the expense of the Stabilization Fund, in other words, infected cells of the tumor are spreading throughout the organism. At the same time, we are developing a new disease which can rightly now be called the Venezuelan disease. Its course in Venezuela is shown in this graph. Before 1957, when oil in Venezuela was mined by private American companies, Venezuela's economic growth rate was the highest in the world. It set a record of economic growth, as a result of which by the late 1940s-early 1950s Venezuela became one of the richest and most developed countries in the world at the time.

In the late 1950s a national-political consensus took shape against the exploitation of the national riches of Venezuela, above all oil by the American imperialists and the local oligarchs. So, the government that came to power in 1958 set about nationalizing the oil industry which, along with the nationalization of metallurgy, machine-building, transport, the infrastructure and some banking agencies, took practically 20 years. Planning commissions and regulatory bodies were created. Public-private partnership was very active. During those 20 years the structure and content of the Venezuelan economic model was radically changed. Instead of the economic model based on private companies there emerged a state monopoly, the oil company of Venezuela (PDVSA), and state monopoly in other sectors.

After that, as you can see, the per capita GDP in Venezuela has been steadily declining and is still declining in the new conditions. There is probably no more obvious instance of a continuous decline of per capita GDP both compared with the world average and in absolute terms. Today per capita GDP in Venezuela is 32 percent less than it was in 1957 in terms of its real purchasing power. One can easily imagine what the purchasing power of the Russian population was in 1957, subtract 32 per cent and imagine what the per capita GDP and the level of private consumption in our country would have been if such policy were pursued during all this time in our country.

We did not pursue such a policy at the time, but after Venezuela's successful example it was copied in a whole number of other countries that found themselves in possession of rich oil resources. These are countries, many of which then became members of the Organization of Petroleum Exporting Countries, OPEC.

As you see, in 1960s-1970s all these countries shown here nationalized their oil industries, nationalized the export infrastructure for delivery of crude and petroleum products, and in this way they managed to reverse the trend of burgeoning growth of their economies, the growth of their per capita GDP.

From the mid-1970s all these countries witnessed a decline of per capita GDP which continues to this day. No other group of countries, including countries south of the Sakhara, experienced such a dramatic and profound decline of economic potential as the OPEC countries experienced as a result of their nationalization, as a result of what may be described the Venezuelan disease. This is the general indicator of trends for 10 OPEC countries.

How can the Venezuelan disease be described in medical terms? It can be described in roughly the following way. If the Dutch disease is a tumor caused by an external infection simply because a country has an oil industry or a closely related gas industry, the Venezuelan disease is nationalization of the oil industry, nationalization of the gas industry. In other words, it amounts of a grafting of a tumor that arose as a result of infection onto the central nervous system, the system which is in change of controlling the economic organism. As a result, the tumor hits the central nervous system, in particular the brain.

What we have seen in the case of shrinking production is an obvious sign that the brain is dysfunctional. The Venezuelan disease proved to be so attractive that it was engineered not only in Venezuela and other OPEC countries, but it proved to be so attractive that there was an attempt to graft it onto Russian soil. The graphs show the changes of the value of some Russian companies in 2001-2002, with some signs of the Dutch disease, but in the absence of a full-blown Venezuelan disease in the oil industry. We see that a company that reported the highest growth rate, that doubled its output within six years, the YUKOS company, which was at the time the most efficient, the most dynamic and the most transparent company that attracted many foreign specialists and that managed to introduce cutting-edge technologies of oil extraction was naturally much in demand among Russian and foreign investors. So, that company's shares were growing rapidly, much faster than the Russian Trading System index.

By comparison, the companies which did not pursue similar policies and were substantially less effective, less transparent and less well managed, did not enjoy the benefits of such attention on the part of investors. Their value, both absolute and relative, was shrinking.

In fact, this is the mechanism described in practically any economics text-book, any text-book on investments. The companies that grow rapidly, that quickly cut their costs -- and YUKOS cut the cost of one ton of oil extracted by six times in as many years -- the companies that are transparent, naturally, attract financial, economic, human and other resources. And vice versa, the companies that are lagging behind, see resources flowing away from them.

This is a classic example you can find in any text-book on economics or investments. As we know well, in 2003 when the Venezuelan disease here entered an active stage, and the savaging of the YUKOS company began, the situation changed radically.

Seeing that YUKOS was under attack from the authorities, investors, both Russian and foreign, tried each at a different time to leave the company that came under attack and shift their resources to less effective, less transparent and less dynamic companies, which however were under a political umbrella.

In this way, the negative selection mechanism worked, in other words, the natural selection process in reverse. The actions of the authorities did much to cause a redistribution of assets in favor of less effective economic entities and accordingly, in favor of a substantial slowdown of economic growth and deterioration of its quality.

As a result of corresponding actions, the annual rate of growth of oil extraction -- you can see it for three months sliding down. It was in steady uptrend until July 2003, but in down trend from July 2003. As you know well, in the last six months oil extraction, which had been growing steadily without interruption over the seven preceding months, has been in a state of stagnation in the last six months. The total volume of investments last year dropped by 20 percent.

So, what was not achieved under other conditions was finally achieved. There is a small section devoted to the treatment of the Dutch and Venezuelan diseases. Just a brief comment. And you have the last part.

The question arises, can this be controlled and how? To understand the methods of treatment doctors usually look at how patients behaved in similar situations and what factors contributed to their recovery and what factors had an adverse effect.

Here you see the countries, various groups of countries for various periods over the past half century. The first on the left- hand side is a column showing market economies. You see the number, 7.8. What is it? It is the probability of these countries doubling the GDP over ten years. Out of approximately 150 countries with a market economy that existed during the half century the probability of GDP doubling -- that is, the maintenance of fairly high rate of economic growth at the level that journalists sometimes describe as an economic miracle -- amounted to 7.8 percent, that is, one in every 15 or 16 countries doubled GDP over a period of ten years.

Countries with planned economies -- and the period represented here is from 1950 to 1991 -- exhibit a much lower probability of doubling the GDP, their growth being 3.4 percent. It means that there was only one instance, one decade out of 33 possible decades for which data for planned economies exist, could manage to double the GDP.

The next group of countries with transitional economies -- this is the period from 1989 for Central and East European countries and since 1992 for the former USSR. We see that the chances of doubling of GDP are the same as for planned economies. This is understandable because for many of these countries the 1990s were very difficult and marked by a serious economic crisis.

Then the situation gets interesting. The oil exporting countries, throughout the 53 years when the observation was conducted, we see that the probability of doubling of GDP for the oil exporting countries is 18.6 percent, two and a half times higher than even the average for market economies. It shows that, given other equal conditions the countries which have oil resources have much greater opportunities for a high rate of economic growth than countries with market economies in general, especially countries that don't have oil resources.

On the whole the oil-rich countries are in a favorable position. But only on the whole. If, however, we take a close look at the group of the oil-exporting countries, it falls into the following groups which will give us an insight into how different the behavior and the development trends in these groups are.

The first group is OPEC countries, the ten countries, after 1973. Which countries? These are countries which nationalized their oil industries, nationalized their energy industries, nationalized their oil infrastructure and are also involved in the regulated world oil market. As a result, the chances of these countries doubling their GDPs proved practically the same as for countries with planned economies for nearly half a century, which is not surprising because in their economic structure and economic system those countries are not much different from planned economies.

The next group of countries are OPEC countries that developed after 1973. Those were countries which did not nationalize their oil industries. These countries still have much of their oil sector dominated by private companies. But these countries, because they have to sell oil in the world market where OPEC is very strong, the international oil cartel, inevitably experience the impact of the cartel.

As a result, the chances of these countries doubling their GDP were four times higher than for the OPEC countries, and it turned out that these countries could develop faster.

Finally, the last group of countries are oil exporters prior to 1973. Those countries did not nationalize their oil industry; their oil sector was dominated by private companies; those countries were not controlled by OPEC or any other center in the oil and petroleum product market. For that group of countries, for that period there was the highest probability of the doubling of GDP, nearly 23 percent, that is, GDP doubled for this group of countries every fourth decade in nearly one of four cases. Therefore, comparison of this data gives us rather good understanding -- as they are all countries for which there is statistical data -- of what economic policy it is necessary to have, if we want to have economic growth rates as high as possible, in what situation we should choose this or that path.

If we want to show down economic growth rates as much as possible, we also know which path to go along. We can either choose a planned economy path or the path of nationalization of the oil industry or participation in a managed oil market. In those cases, growth rates will be minimal and the probability of doubling GDP will also be minimal.

This chart is another illustration showing the same. It shows changes in GDP per capita over more than 20 years for countries where private companies have remained and continued to work in the oil sector and countries where state-owned companies work in the oil sector. Actually, the choice is also clear.

Finally, the last but one slide in this group shows a comparison not for all countries with a market economy or for all countries having oil sectors, but for countries which are particularly similar to Russia, countries which have for decades or ages had a common history, a common economic and political system, where people with similar habits live and the like. They are the countries having emerged on the former Soviet Union's territory: Azerbaijan, Kazakhstan, Russia, Uzbekistan. Those countries have virtually everything in common or very similar. They only have one thing that is different. They have different energy sector systems.

In Uzbekistan, the oil and gas industry is fully nationalized and is state-owned. In Russia, the oil industry has been privatized to a substantial measure, yet not fully. Russia has a state company engaging in production and a state company engaging in oil transportation. Besides, in the gas sector there is a major state- owned gas company with a very insubstantial share of private gas producers, and the gas distribution and gas transport network is also nationalized.

Kazakhstan is a country that has privatized virtually all of its energy sector, having sold a substantial share to foreign companies. In Kazakhstan, there is one small state company, but its size is incomparable with the share of the state sector in Russia's energy industry.

Finally, there is Azerbaijan, a country which has completely privatized all of its energy sector and has sold virtually all of it to foreign companies.

Economic growth rates, GDP growth rates shown here for the past seven years, the period after economic decline at the end of the 1990s, as this data shows, as this comparison shows, were not accidental. They were not the result of fluctuations in the market. They have not resulted from any particular situation in this or that country during some particular year. One can see here a certain pattern, which has been observed during the maximum period for which there is relevant data.

So, it is absolutely clear which approach, which treatment should be applied, depending on what goals those engaged in treatment of this or that economy having an oil sector have set. If we need to ensure minimal economic growth rates, we should certainly go along Uzbekistan's path. If we want high economic growth rates, there are other options.

Actually, you can see here a certain list which is not exhaustive for treatment of the Dutch and Venezuelan diseases, yet they are important means. They are the medicines which proved rather efficient in other countries and which showed similar results when they were applied in Russia. Those include the creation of a stabilization fund, using those funds exclusively outside the country's borders, privatization in the oil and gas sectors, removing all restrictions for foreign investment in the fuel and energy sector, lifting restrictions on investment in the fuel and energy sector's transport infrastructure -- pipelines, ports, power grids, the sale of energy assets to foreign investors. Naturally, where possible and to a possible measure, it is necessary to liquidate or limit OPEC's monopoly in energy markets.

Naturally, this is not the full list of medicines, but at least you can find some ways of treatment here. This deals with these two diseases only. Even though, naturally, there are other diseases in this country.

There is an interesting situation related to the Venezuelan disease. This term has been proposed, but perhaps it requires some explanation. I read a report on what is happening in Venezuela recently. As you know, the very patriotic government there has been toughening control of the small number of foreign companies that still work there. They have also increased tax rates, limited the issue of oil production licenses. And when Venezuelan business people yet again complained to the Venezuelan authorities about the fact that they are totally stifling business in Venezuela, the Venezuelan authorities replied: "Why? Just look, we are doing it the way they have done it in Russia. We are not nationalizing your companies." So, what we call the Venezuelan disease may be a different name, in fact.

Speaking about the disease proper, we have faced it on such a big scale that this state could perhaps best be described by the term "anesthesia". I would like to draw your attention to the fact that two types of anesthesia are possible: it can be natural or half- natural and it can be artificial. Artificial anesthesia is specially done for surgery, and it is clear about natural anesthesia.

What is that? Anesthesia is the loss of sensitivity. It is a state resulting from the fact that sensitive nerves stop conveying irritation from the periphery to the center, to the cortex.

Much of what is happening in the Russian economy and not only the Russian economy bears clear signs of anesthesia, of the loss of sensitivity to what is happening in the country, to various events. There is no natural reaction of the body with the natural goal of survival.

We can see this in a number of cases, including the YUKOS case or the situation in the energy sector, as well as other things. Signals have been constantly sent that this or that should not be done because this will harm the organism. Still, those signals have not been perceived and one gets the impression that there is no reaction. On the one hand, this state of natural anesthesia has been intensified by stormy application of artificial anesthesia.

In the situation we are discussing, it is possible to say that the receptors such as political parties, independent deputies, and independent media outlets are other cut off by surgery or suppressed by various means. As a result, the number of nerve endings still existing in the economy and society tends to go down substantially, and the body loses sensitivity to irritants existing in our life.

Naturally, this substantially increases risks for the whole body, because the body does not feel, does not sense where there is danger and what large-scale steps cannot be made.

But anesthesia is just one element in this rather wide and complex range of diseases our economy has. If we tried to characterize this whole range of diseases, I would describe the main disease as drug addiction. I would rather not invent anything here, because there are scientific definitions. Let me just read out several definitions of this disease from a medical encyclopedia.

Drug addiction is a disease resulting from abuses of drugs. Drug addiction is manifested in unending need to consume narcotic substances, because a patient's physical and mental state depends on whether or not the patient has consumed the required preparation.

Drug addiction leads to serious distortions in the performance of a body and to social degradation. This is a chronic disease. The cause of the disease is the ability of narcotic substances to cause a certain state giving one the feeling of absolute physical and psychological comfort and wellbeing. A drug addict does not resist this state. It rapidly develops and requires the consumption of increasing amounts of narcotic substances. This is a heavy disease and it often leads to catastrophic results.

Drug addiction starts with repeated consumption of drugs as a result of willingness to again and again have a feeling caused by a narcotic state. Without drugs, an individual feels dissatisfaction. One is short of something. Only another dose of drugs brings calm and satisfaction. This way drug addiction develops, this is a disease because it is not a body's natural demand, yet it gradually presses out natural desires.

With time, the effect of a narcotic substance weakens and the patient has to increase the amount of consumed narcotic substances to attain the former effect. Gradually the intensity of feelings goes down, and the narcotic state is rather pleasant because the state without narcotics is unpleasant. The patient is nervous and tense, unable to focus on anything, divert thoughts from narcotics. In this case, drug addiction is accompanied by irritation, suppressed feelings, inability to focus on anything, and the physical state worsens.

To satisfy the addiction, a drug addict is ready to be humiliated, to deceive, to betray, steal or resort to violence. If a narcotic is not received by a drug addict for a brief period, the so- called drug withdrawal syndrome develops, a depressed state with heavy mental and physical disorders, and it is dangerous for one's life in certain cases.

During the drug withdrawal period, convulsions and psychosis with hallucinations and delirium may occur. The functioning of all systems in a human body goes out of order, blood pressure rises, the heart beats, muscles are tense, muscular pains and tremors are possible, as well as convulsions.

As the disease advances, the body is exhausted, previous amounts of narcotics cause grave poisoning, and patients can only consume half of the usual amount or less. A new dose makes things slightly better but doesn't give energy or joy. And if no drug is taken, a patient feels so weak that he may even die.

Mental exertion leads to deep emotional disorders and depression. As the body becomes weaker, it becomes more susceptible to infection. A drug user when under the influence of drugs may easily get in trouble. Social losses caused by drugs are immense. A drug addict quickly loses interest in anything that is not connected with drugs. He then loses strength that is necessary for organized life and work. The moral degradation of a drug user begins with forced unlawful actions to get a drug. And as he loses the ability to earn his living lawfully, he resorts more and more often to unlawful ways of getting drugs. The resulting mental weakness, and in some cases mental deficiency, accelerates moral and social degradation.

The environment that surrounds a drug addict or that he forms himself leads to moral degradation and higher crime rates. From time to time he suffers from bouts of unprovoked aggression and gets rejected by the people around him more and more often.

Treatment. Now that we have talked a little bit about symptoms and the diagnosis, we should say something about treatment. The treatment of drug addiction is a very difficult and long process that does not always guarantee success. It takes at least several months. But that applies to a person. In the case of the economy, it will take much more time. During this long period a drug addict becomes used to living without drugs and forget the environment in which he become addicted to drugs.

In order to make treatment effective, a patient has to change the circle of people surrounding him and start doing something useful. Sometimes he needs to change work or residence and move to another area. There may be a recurrence some time after the treatment. Usually new bouts of the disease occur after he takes the same drug or alcohol that increases attraction to drugs. The sooner the person to see a doctor in this case, the easier and faster the treatment will be. I can only add that the sooner a patient sees a doctor who knows how to treat this disease, the better.

I would like to end the first part by saying that the disease or rather the group of diseases that have afflicted the Russian economy are very hard diseases. Unfortunately their treatment may not be easy and simple. To our great regret, it will require a lot of time and a lot of effort from Russian society. Thank you.

Moderator: Dear colleagues, we have time for questions and short technical announcements. If someone misses a question or Mr. Illarionov's answer, you will get a transcript. It is being done right now. So you can get it in the form of a text before your stories come out. If some you need an audio version, it will also be available. And when you ask a question, please, give me a signal I will say who will be the next to speak so that he had time to prepare his question.

Q: I have two short questions. The first is about the consequences of the verdict in the Khodorkovsky case. And the other one is how would you comment on Central Bank Chairman Ignatyev's statement made today, in which he said he was hopeful that inflation this year would be 8.5 percent and that there would even be deflation in July and August? Do you share his hopes?

Illarionov: As far as your second question is concerned. Indeed Sergei Ignatyev thinks that inflation may slow down considerably in the coming months. To prove his point, Ignatyev and Central Bank personnel refer, on the one hand, to inflation dynamics in May. The Federal Statistics Service has not released its report yet, but I think inflation in May will be around 0.6-0.7 percent. But on the other hand, they refer to a much lower rate of base inflation in the recent period.

Theoretically, such a possibility exists, that inflation will be lower than in the first several months of the year. But I personally have serious doubts that the annual inflation at the end of the year, including December, will be within the range outlined in the social and economic forecast for 2005, which put it at 8.5 percent. But theoretically it is possible. However I think it is very unlikely, especially since the annual inflation rate for consumer prices is 13.7 percent after April as compared to April 2004. The annual growth of wholesale prices for industrial commodities is 20 percent higher. So I think it is quite unlikely even though it would be quite desirable.

On your first question, I must say that the verdict is a result of the diseases that have metastasized the economy and our society. From my point of view, this court demonstrated a profound lack of competence in terms of economy and jurisprudence, and statements made by the sides showed their lack of good command of the Russian language. As the person who watched the hearings for some time, I was shocked by the low level of competence of the people who represented the state. And I personally felt and still feel very ashamed of the state that has to represent itself in such a way.

I think that the trial and the YUKOS case have not ended. It may seem strange, but it is only beginning even though it has been on for more than two years. During these two years the case caused tremendous damage to our country. It became perhaps one of the most vivid events that exposed a number of fundamental changes in business, the economy, the economic policy, the political system, mass media, ideology, aesthetics, let alone ethics.

From my point of view, the YUKOS case is the biggest economic and political event in the country in the last 14 years since August 1991. The crisis in August 1998 was a big and very grave event, but it changed perhaps only one thing -- economic policy. Our economic policy improved after August 1998. but none of the other elements in the system that existed before August 1998 was touched by this crisis.

What is happening now will bring about very deep and very serious changes in the economic, political and public system in the country. The magnitude of these changes is hard to perceive at this point, but the damage caused to the country is already is already so big that it is hard to estimate it in full. Therefore, it is not clear how much time and how many resources will be necessary in order to recover from this damage.

Q: Interfax carried a report yesterday, which quoted unnamed government officials as saying that the privatization plan for 2005 had already failed. Can you comment on this in any way?

Illarionov: I wouldn't do that even though it's not a very pleasant fact because there is once again a discrepancy between what was planned and announced and what was actually done. But perhaps it is one of those rare occasions when I would not get very upset because privatization should be carried out not for a box in a government document to be ticked off and not for the sake of some plan, just like many other things, but in order to make up for a budget deficit if there is any.

At present there is no budget deficit. As to how privatization has been carried out, we all can see a vivid example of that. For example, I think that a delay in privatization would be not harmful or dangerous but on the contrary would be useful.

Q: I would like you to go back to the topic of your presentation. You outlined the methods to be used in treating overweight, tumor and neurosis.

Illarionov: No, these are not methods of treatment, it's diagnostics.

Q: Very well, let it be diagnostics. But only comprehensive treatment can be effective. Does this mean that these cardiovascular and structural diseases are incurable?

Illarionov: Not at all. Modern medicine and modern economy have developed enough methods and medications to treat diseases, even those that hard to cure. We simply did not pay them enough attention because it is not possible to touch all diseases in one hour.

As for the Dutch Disease, there are all signs of it: overweight, tumor, and neuroses. One of the ways to treat it, actually the basic treatment is diet. Diet should match the body, its size, its scale and its constitution. We can often hear that it is necessary to feed the body better by increasing investment. But that may apply to a small and underdeveloped body that already has big overweight problems due to high fat and calorie nutrition. So these people recommend to increase the number of fat and high calorie products and not to cut down on the consumption of products that could otherwise be useful. But in this case additional high fat and calorie nutrition will have a devastating impact on the body.

When the body grows up and becomes stronger owing to work and motion, when the body becomes bigger, it can increase nutrition. But it has to grow for that. If we rush things, the consequences may be very bad. We all know that if a person has suffered from malnutrition and dystrophy and then he is allowed to eat much, he may get twisted bowels and have very bad consequences. In order to avoid that doctors and economists recommend healthy and balanced nutrition that does not exceed the body needs in terms of investment and other resources.

Q: How can the situation in the European Union affect the Russian economy? France and the Netherlands have voted against the Constitution and (inaudible)... What impact may this have on Russia?

Illarionov: I hope it won't have too big an impact on Russia. We are not a member of the European Union, but we can make several conclusions. One is related to the obvious change in the dollar and euro trend. This change is connected with the difference in the key economic indicators in the US and the euro zone. The US has been showing bigger economic growth in the last 20 years than Europe. In the first quarter of 2005, the US GDP grew by 3.5 percent, while in Europe, which has always lagged behind the US, once again showed that it continued to fall behind the US in the first quarter of 2005 in terms of economic development. GDP in the euro zone grew only 1.3 percent annually, and may slow down by the end of the year.

So the change in the dynamics of currency exchange rates reflects among other things changes in the economic potential of the world's two biggest economic regions. This may affect us through the change of the role the dollar and the euro play in the basket of currencies to which the Central Bank pegs its operations in the currency market. In this case, if the euro continues to fall, compounded by the double "no" in France and Holland, the actual value of the ruble may grow faster than in the previous several months or year. In this case, the pressure of high costs on the Russian economy will be even bigger than before, thus making prospects for economic growth in Russia even more moderate.

This means that fiscal authorities -- the Central Bank, the Finance Ministry, and the government in general -- can and should take adequate measures in order not to increase costs in the national economy, for example by increasing the cut-off price for the stabilization funds, not by increasing non-interest expenditures or by creating an investment fund because this will ruin the rapidly deteriorating macroeconomic situation. So they should do the opposite.

There is one other effect of these decisions, and it shows that such social, socialist and bureaucratic engineering projects that are under way in Europe are supported mainly by international European bureaucracy and get little support from the peoples of Europe because the accepted model offers no opportunity for successful competition in the modern world. From this point of view, we should draw a very important conclusion about with whom we want to integrate and how, from whom we want to learn and how, and what we are going to learn from the region of the world that has been stagnating for the last quarter of the century, that has been caught in a web of bureaucratic regulation and high taxes. Or are we going to learn from other regions of the world that are developing incomparably faster.

Q: I have two questions. One is a follow-up to your comment on Khodorkovsky. How may people do you think (inaudible)... share your point of view? And the second question is about the main topic of this discussion -- the disease. First of all what are the factors that secure successful treatment of such diseases? And what are the chances that Russia will be cured completely?

Illarionov: On your first question, frankly speaking I have never inquired about that. On the second question, it depends on the country itself, on whether it is ready to begin treatment sooner or later. We know from our own experience how difficult it is sometimes to start a new life or to put oneself on diet even if it has been recommended by the doctor, and how we postpone the changes. And even if we make them, it all comes back after awhile. In medicine it is called amnesia -- forgetfulness and a return to what eventually may cause a very big shock.

Unfortunately, life shows that different countries began treatment at different times. Sometimes it took decades, several decades. And sometimes several centuries for the necessary national, political and social consensus to emerge to break out of a crisis that lasted years and sometimes centuries.

Nevertheless, the way the modern world is developing and the fact that the modern world is before our eyes and Russia is not isolated from the modern world, gives me and the overwhelming majority of our citizens hope that sooner or later we will come to grips with this.

Q: Radio Liberty. My name is Shakirov. I have two questions. The first is about petrol prices. Several years ago you said that prices for one liter of octane 92 and octane 95 petrol, which are the most popular in Russia, were 25-30 cents per liter. You said that these prices were a hindrance to normal economic development and you cited the example of Ukraine were prices at the time were 50- 60 cents per liter. You said it was necessary to slowly raise the prices to make the Russian economy more effective because it was hard to develop with such low prices. That's the first question. What do you think should be the price and do you like the current prices?

Illarionov: Let me say right off. What you have said is not my point of view, it is a very distorted and incorrect interpretation which was imputed to me by the media. I have nothing to do with that point of view.

Q: Sorry, but I have seen it, I have read it myself.

Illarionov: Well, thank you for asking me this question because it gives me a chance to speak about it not only to you but to my colleagues. The views you presented do not belong to me and I do not share them.

Q: Does it mean that the current prices suit you, that they are normal, or do you think that they should be lower or higher?

Illarionov: You know, the very fact that you are asking this question and even more so the fact that civil servants answer such questions when asked whether or not they are happy about corresponding prices -- this very fact is a symptom of a substantial deterioration in the quality of economic policy and indeed of the grasp of modern economics.

Prices are not man-made, as they are in a planned economy. Prices are the result of supply and demand. High or low, fast- growing or fast-falling prices are the result of a complex interplay of economic phenomena.

I would say that prices are like temperature which you measure to monitor the health of our organism. So, any phenomena, including what we have recently been hearing not only from the Saudi oil minister, but also from the Russian Minister of Economic Development to the effect what prices are right and what prices are wrong, I my view, take us back to a very different era, we have been there before and we know what they lead to.

So, prices in a normal free market economy are the result of interaction of millions of economic subjects, and this provides information for those who determine what is happening in the economy.

Q: And a quick second question. Mr. Illarionov, several months ago you described the Yukos episode as the "swindle of the year", whereupon you lost one of your official positions, at least as officially reported. Aren't you afraid that after another press conference the Kremlin, or your bosses will react and you will be stripped of your post of economic adviser to the President? And a follow-up. Surely, you have told President what you are telling us now, how is he reacting to this?

Illarionov: I have already given detailed explanations on this score, and I think I did it in this very room on February 8, I think that meeting was called "On the Uses of Information". In fact, I can repeat for your benefit and maybe for the benefit of those who did not attend that press conference that I quit the job of sherpa, or Russian representative in the G-8 on my own accord, and the President accepted by resignation. One of the reasons was the decision of the Russian Federation to ratify the Kyoto Protocol . That was an area with which I dealt as the country's representative in the G-8 and as representative of a G-8 country which in a month's time will discuss climate change and measures to prevent climate change, global warming and measures to spread Kyoto and post-Kyoto limitation to cover Russia and other countries of the world -- an agenda proposed by Britain.

From my point of view the Kyoto Protocol is a blow on the Russian economy. The theory of global warning is not borne out by scientific data and is, strictly speaking, charlatanism. From this point of view I thought it was impossible and unnecessary for Russia to ratify the Kyoto Protocol.

Because it happened it was an open secret that I could not continue in my job. I asked the President to relieve me and the President met my request. I am grateful to him for this.

As for your second question, I will finish the work that I must finish. My job is called adviser to the Russian President. It is an official post. Translated into medical terminology it's a job of a doctor who monitors (one of the doctors, but not the only one because there are many) who monitors the state of health of the Russian economy. The task of the doctor (if he sticks to professional ethics and tries to abide by the Hippocratic oath) is to adequately assess the state of the patient, to detect problems as early as possible and to give objective recommendations for treatment. If one feels that the doctor's task is to hide from the patient his diseases, then it is a different kind of job and it's a different position. In that case the person who holds this position should be immediately fired. Because in any case hiring and firing from this job is within the competence of my employer, he is free to take any decisions on this. For my part, I only do what I think is absolutely necessary to do and what is within the range of my job description.

Q: What about President Putin's reaction, if you please?

Illarionov: You know, beginning from April 12, 2000, from the moment I took up this position, I made it a rule -- forgive me, if you can -- that I never discuss my relations with my employer with anyone except him.

Q: The Wall Street Journal, Gregory White. One general question and one a follow-up to what you said. We know from medical practice that a patient's admission that he is sick and a desire to be cured greatly help the process of cure. To what extent does the patient recognize the disease and is he ready to take the right kind of treatment? And another question. You have said that this is only the beginning of the Yukos case. What do you mean?

Illarionov: As regards willingness and readiness -- that depends on many factors. And one factor is the readiness of society itself to follow that path.

The current state of the Russian society is one of transition toward an understanding of the dangers that are in store for it. But I am not aware that there is a broad understanding of what is happening to the Russian economy and Russian society. Moreover, to listen to some prominent newsmakers, their recommendations are by and large of the opposite kind. And because it is these recommendations that are reported by large sections of the mass media, this creates an illusion among much of society that by further redistribution and further increase of expenditure and by chipping away at the Stabilization Fund, by increasing investments, interbudgetary regulation and subsidizing various groups of the population and various sectors any problems could be solved.

These are precisely the kind of measures that create and not solve problems. So, I think we have yet to pass through a further stage of growing awareness of our state. I do not rule out that at least from the economic point of view we will have to live through more than one shock which may persuade at least part of the political elite more effectively than theoretical reasoning, as was the case in August 1998 regarding what path should not be followed and what path leads to a cure.

Q: And the continuation of the Yukos case?

Illarionov: You know, it conjures up a story. It may take five or seven minutes to tell it. In 1307 (laughter) the Templieres Order were pushed out of Palestine. You know that there were Crusades and the Templieres Order of crusaders was based in Jerusalem. But they were pushed out by the Muslims. After rearguard battles at least elite of the Templieres Order led by the chief Magister Jacques de Molay arrived in France, which was at the time the riches European country, the most developed economically and also militarily, their aim was to raise more resources for another crusade to Palestine.

The wealth of the Templieres was the stuff of legends, still is. Those were indeed huge resources. Besides, the Templieres Order, as we well remember, was an efficient organization, one of the most effective organizations of the time. When Jacques de Molay appeared in Paris in his Temple it turned out that he was easily the riches man in France at the time. The wealth, not his personal wealth, but the wealth of the Order was in some ways comparable to the wealth of the Royal Treasury. Besides, because he was, of course, the head of the Order, he preached a certain ideology and principles which he felt he had to apply and which he declared in Paris. But Paris was no longer the Paris of two centuries earlier when the first crusades were organized. Paris and the Court were interested in other problems. So, the appearance of Templieres did not cause much jubilation among the French leaders of the time.

During an uprising in Paris a year earlier, King Philip IV the Beautiful, hiding from the rioters, found himself temporarily at the residence of the Tamplieres and, legend has it, he saw casks with gold belonging to the Order.

Because the Templieres insisted that France should substantially change its policy and offer resources for implementing the ideological concept of the Templieres and because de Molay was a fairly popular man he posed problem for the authorities.

Accordingly, in October 1307 Jacques de Molay along with seven hundred other prominent Templieres was arrested and put in the royal prison. For about seven years he was under investigation and then was put on trial in which the Templieres were accused of heresy, of links with the Devil, of worshiping not Jesus and the Cross, but some kind of animals, some kind of three-headed monsters, etc.

Because the whole procedure was absurd and non-sensical, the Templieres naturally at first denied any guilt, but they were tortured and some started making forced confessions that the investigators and prosecutors wanted from them.

Nevertheless there was hope, at least it was suggested to de Molay himself that if he confessed the sentence would be quite mild for him and his colleagues. But when the sentence was announced -- life imprisonment, Jacques de Molay realized that he had been cheated and told the court that he was innocent and that the Order was innocent of the sins imputed to it.

The court modified its decision and on the evening of March 28, 1314 Jacques de Molay, the Grand Magister of the Templar Order and his closest associate and friend, the prior of Normandy, were burned at the stake.

Legend has it that when the flames started licking his body, Jacques de Molay cursed the King of France as well as Pope Clement V whom he had obeyed for a long time as the head of the Order, because it was a Christian Catholic Order, but who, in spite of early attempts to speak in his defense, eventually betrayed him and agreed with the King of France on a common front against heretics and effectively put the fate of Jacques de Molay and the Templieres in the hands of the royal court.

So, he cursed the King and the Pope and told them to present themselves to the Lord within a year from that date. In a little over a month, on April 20, 1314, Pope Clement V died a sudden death. And 7 months later Philip IV the Beautiful, the King of France, died a painful death.

The two deaths split public opinion in France. Some still held that the Templieres were innocent and had been unjustly indicted, others continued to insist, like before, that the twin deaths were a clear proof that the Templieres had some dealings with the Devil.

But that was not the end of the affair. The curse of the Templieres continued to haunt the Capetingians and over the next few years the sons of Philip IV the Beautiful successively were enthroned and died. That was the end of the Capetingian dynasty and Philip VI Valois was enthroned.

But because his claim to the throne was not as strong as it would have been if he were a direct heir, a lot of problems arose of which the English took advantage. They landed in France and that marked the start of the Hundred Year War. As a result France was devastated, destroyed. For a century and a half France was beset with calamities. After a while, France was hit by Great Plague.

When I think of what history has to tell us, I think that when different representatives of civilized countries settle accounts between them, the winner in these arguments and civil wars is not civilization but barbarism. Instead of what France was like, there followed more than 100 years of war, the Octobrists and Constitutional Democrats with Purishkeviches in the Russian State Duma were succeeded by the Bolsheviks 100 years ago. They put the Octobrists, the Constitutional Democrats and Purishkeviches to the wall -- those of them who had not managed to flee the country.

When arguments, let us say, between Khasbulatov, Dudayev and Maskhadov are sold in this way, they are replaced -- well, we know who replaced them. The moral is that civilization never wins in such conflicts. Instead, androids come to take the place of civilization. And this is the biggest challenge and the biggest threat for our country. Unfortunately, we are, I think, on the brink of an abyss and we have even raise one foot over the abyss. I think we should use every opportunity not to take the next step and to creep away from the edge of the abyss.

Q: After such a historical essay it's hard to ask any questions. But it's about energy reform (laughter). Because you contributed to creating the ideology of reform, it would be interested to know whether the energy crisis was a sign that the reform has flaws, or is it just an accident that occurred because reform has not yet been completed.

Illarionov: First of all, thank you for including me among the ideologists of the reform. That is indeed true, only, I am an ideologist not of this reform but of a different reform, which was never implemented in Russia but which, as it turned out has been almost fully implemented in Kazakhstan. As far as I know, there is nothing in Kazakhstan remotely similar to what happened in Moscow on May 25 and many other places of the Russian Federation after May 25 and before May 25, something that the Russian media, strangely, did not report. And my ideology has nothing to do with the reform that has been implemented.

Now about what happened in Moscow on May 25. It was quite obviously a technological accident. The kind of accident involving switches that occurred at the Chagino substation happens tens of times all over the country every day. This is all in a day's work at such substations.

Various mechanisms exist to stop such accidents developing: switching in reserve capacity, switching from disabled transformers to other transformers and so on. Until April 1, 2005 never had such massive accidents occurred. And the question arises, why didn't it happen before and why did it happen now?

It happened for several reasons, and not because there was something wrong with the hardware, the hardware has been and will probably be like this for some time yet.

It is impossible to rule out the possibility of a technogenic accident. One can merely diminish its probability. The corresponding protection systems that are created are designed to minimize the probability of such an accident. There exists the first system, the second, fifth, tenth, various systems of protection.

It ultimately depends on man, because man creates protection systems, whether the likelihood of an accident increases or diminishes. What was being done over the past five years inevitably increased the risk of accidents. It did not guarantee that such accidents would occur, but increased the risk of such an accident many times over.

How did it take place? It took place because the economic mechanism of the functioning of the energy system was changed in the Moscow region, in the Central region and actually all over the country.

While in the Soviet times and in the early post-Soviet period the bulk of electricity in the Moscow region, consumed in the Moscow region, was generated in the Moscow region, in recent years the situation changed and the comparatively expensive electricity generated at Moscow's stations was replaced with cheaper electricity coming from outside the Moscow region.

From the economic point of view this is an absolutely normal and reasonable solution which cuts relative costs. But to implement such a system some additional things had to be done. It was necessary to strengthen the infrastructure that insures the transmission of large amounts of electrical energy from outside the Moscow region. Nothing of the kind was done. No investments were made in the transmission lines, the relay lines, the substations and so on. So, the old equipment was operated at above its capacity. Over the past few years the main elements of the electrical infrastructure in the Moscow region and some other regions operated at the top of their capacity and even above capacity, without any attempts to undo these bottlenecks.

Let me remind you that according to the ideology of another power industry reform opportunities had to be created for free investment by private investors, state, municipal and foreign investors in any power generating facilities, but above all in the networks. And just as the character of the energy reform was being hotly debated, working group of the State Council for the Reform of the Power Industry and many of its members pointed out that infrastructure and not generation was the real bottleneck in the Russian power industry. Even then we generated 30 percent excess energy, and there is still an excess of energy today.

According to the reform ideology that was adopted and that prevailed private investors were not allowed to invest in networks and for those unfortunates who do make such investments and build networks there is a rule that was introduced due to the interference of RAO UES. Such networks are put into operational management of RAO UES. Naturally, after that not a single reasonable person or reasonable investor invested anything. Having said that, five years ago many people, energy specialists proposed to build power transmission lines from the Leningrad nuclear plant and from other regions to Moscow and other places because people predicted that it was in this region that a shortage of energy was most likely.

Another factor that substantially increased the risk of an accident was the division of existing companies, for example, Mosenergo, into 13 new companies. As a result of the division the property of these companies because all mixed up and not clearly divided.

At the Chagino substation the actual equipment belonged to one company and the actual operation of the station was done by another company. When the accident occurred no one could even determine who should do what and who should restore and repair the broken down transformer.

Moreover, it turned out that there were two transformers at the Chagino substation, like in many other substations. One is constantly in operation and the other is a standby. It turned out that when the first transformer broke down and the reserved transformer was automatically brought in, that transformer failed to switch on because it was under repair, and repairs were supposed to have been finished a month and a half before. So, not only was the transformer not repaired in time, nobody monitored the repair after the deadline had passed, nobody even gave a thought to changing the scheme for switching the standby transformer, a different standby transformer from the one that was under repair.

It turned out that there wasn't even skilled personnel on the spot to take the right decision.

The third factor is the destruction of the dispatcher system. One may have different opinions about different schemes of reform but, according to the reform ideology that we upheld the dispatcher system was not to be broken up. This is dictated by technology of electrical energy. Dispatcher system at Mosenergo had been divided into three different companies. And when problems arose, when the accident happened, it was unclear who was to address them.

The fourth problem is that neither RAO UES, nor Mosenergo had any information about the accident, about what was happening for the first hour and a half, and accordingly, issued no information to the consumers, including the households and those who could have been doing the repairs or could help to minimize harm to the city and the region caused by the accident.

The result was that the purification and waste collection facilities were overflowing.

All this attests to what we have been saying for many years, the incompetence of those who rose to the top of the company RAO UES.

And the latest data speak for themselves. Repairing the transformer at Chagino costs 180,000 rubles. The net profits of Mosenergo in 2004 amounted to 4.4 billion rubles. So, money was available for all those who wanted to repair equipment. The money was not the result of reforms, but the result of constant increase, excessive increase of the electricity rates.

As for the net profits of RAO UES after all taxes in 2004, they amounted to 54 billion rubles or two billion dollars. That money would have paid for the construction of hundreds and thousands of substations like Chagino, hundreds and thousands of kilometers of power transmission lines and relay stations and everything that was needed to prevent any such accidents in this region or in any other region.

But the money was used for other purposes. Apparently, to buy power plants in Tajikistan, Moldavia and Georgia, to build a "liberal empire" or to finance some other projects.

That is added proof that the goals proclaimed to be the main goals of the power industry reform, namely, attracting investments, using investments, renewing equipment in the power industry -- was a cynical public relations exercise and a cheating of the Russian public and the Russian authorities. Nobody had any intention to do it and a very different set of goals was pursued. So, what happened, unfortunately, is an absolutely legitimate result of what was happening in the power sector over the past years.

Q: When you spoke about drug addiction in the Russian Federation what kind of addition did you have in mind? Addition to oil? And also about Yukos. If this is the most dramatic change of system since 1991, at what stage are we now, how far have we come?

Illarionov: As regards addiction, I meant, of course, addiction to financial assets that flow into the country through various channels. The main sources of these assets are of course the export of oil and petroleum products. The influx of this money has nothing to do with the actions of the Russian authorities and the quality of these actions. So, Weber's famous work on capitalist Protestant ethic is based on the premise that in Protestantism, and indeed in most other world religions and any other ethical schools, right actions are rewarded and wrong actions are punished. In the current situation the system of coordinates is distorted: mistakes are rewarded and right actions are punished. In such conditions the course of the disease connected with narcotic addiction to these assets acquires a totally different scale.

And now regarding where we are at the moment? It is hard to define a state in which we are. At least it is quite clear that in many important ways this state differs from the state in which we were before 2002-2003. The change of trends is seen in statistics and not only in statistics.

By the way, when Khodorkovsky was arrested a year and a half ago I was asked by Rossiiskaya Gazeta if I could describe what have happened. I remember that I said then I could not describe it because it was unclear what the rules of the game were, but I said that in time the rules will become clear. Now the rules of the game are sufficiently clear. There are a lot of analysts, specialists and observers who propose their versions and give their names to the state in which we are. Time will tell whose definition turns out to be more accurate.

Q: It's about poor economic growth in the CIS. In 2004-2005 Belarus is in second place and yet in Belarus the privatization scheme is much weaker than in Kazakhstan or, say, Azerbaijan. It's on page 4. How do you account for it? Have they resorted to some kind of shock reform program on the lines that you proposed and which Russia failed to implement while Kazakhstan implemented easily. You said that Kazakhstan is doing very well.

Illarionov: Didn't you bother to look at page 3.

Q: I might as well look at page 3.

Illarionov: What place was Byelorussia in in 2001?

Q: In 2001? At the very bottom, 4.1.

Illarionov: Quite right. That partly answers your question. A more extended answer is that in order to make a more or less argued judgment as to which model works and which model is more or less successful, it is not enough to use data for just one year or even two years. The slide I showed you at the end or near the end, I think it's pace 17, contains data for seven years for these four countries, and they are as shown in the slide. To pass judgment on the model, for example, in Byelorussia, it is necessary to have data, and just count the average annual growth of GDP in Byelorussia during this period of time, to compare it with the growth rate of GDP in other countries and also -- this is absolutely necessary -- make some adjustments for the special nature of economic relations between Belarus and Russia. After these necessary adjustments, we will at least have data on the rate of Byelorussia's economic growth that are fit as material for further analysis.

I agree that it is one of the most interesting and complicated questions to which there is no straightforward answer. That is indeed so. But such analysis must be carried out, and it cannot be done on the basis of data for just one year or year and a quarter of the next year.

Against this background the Russian example is useful or interesting for us precisely because over six years we have steadily been going down in the league tables of 12 CIS countries, dropping from third to 12th or 11th place. It is shown here, our comparative place among the CIS countries.

Q: The said republics started from the same base and they all emerged from the Soviet planned economy. Are other republics afflicted with the same economic diseases as Russia only because they have no oil and Azerbaijan has?

Illarionov: But we've been there before: it's about the methods of treatment that were applied in Azerbaijan or in Kazakhstan. So, even though they suffer from these diseases, because they apply intensive therapy the consequences for them are less severe than for us.

Q: The Byelorussian economy is not overfed, is not obese, is that a blessing?

Illarionov: No. From that point of view the Byelorussian economy does not suffer from obesity to the same extent as the Russian economy.

Q: What diagnosis do you have for Byelorussia?

Illarionov: When I make a special presentation regarding Byelorussia I will gladly do it.

Q: One last question from Moscow Times. You spoke about some shocks that would cause society and the authorities to become aware of the real problems facing the economy. What shocks? What may happen?

Illarionov: I would hate such shocks to occur. But looking at historical development, I find it hard to rule out that only shocks provide convincing enough arguments for sound and necessary treatment to be applied. Thank you.