Renewal of Russian Reforms

MS. KAREN SHEPHERD: It is my very great privilege to be here this morning. As most of you know, I am Karen Shepherd, the US Director. For those of you who have just arrived, let me explain what has happened here this morning so far. I chair a committee for the British-American Chamber called the East-West Trade and Investment Forum. We regularly invite speakers to come and talk about the various countries in the region that the EBRD invests in. It is a happy coincidence of responsibility because what I do at the EBRD coincides exactly with what I do with the East-West Trade and Investment Forum. We have the enormous good fortune to have Dr. Yegor Gaidar speak to us this morning. We have just had breakfast in the Executive Dining Room with a group of representatives of British and American businesses. It was full to overflowing. Niclas Sundstrom, who is an economist at Citigroup Salomon Smith Barney, spoke to us and set the context for Dr. Gaidar’s speech.

Dr. Gaidar will speak for roughly 45 minutes and then take questions, ending at about ten o’clock. The group who came to breakfast are sitting in the front rows. Any of you who want to stay are invited to hear an excellent panel of business people, represented first and foremost by our own Charles Frank and Niclas Sundstrom of Citigroup and representatives fr om BP Amoco and Diageo. We should be very pleased if you can stay for that.

I should like now to call on Joel McDonald, who is a partner in the firm which is sponsoring this event, Salans Hertzfeld and Heilbronn. I learned this morning that in 1990 this was the first international law firm to be given a licence to practise in the Soviet Union and that it did the first EBRD deal in Russia. I have also just heard what happened to that deal, and I will not pass that on!

Joel McDonald will introduce Dr. Gaidar.

JOEL McDONALD: It is indeed an honour today to introduce Dr. Yegor Gaidar to you. I am sure he needs no introduction to those of you who have followed events in Russia since the collapse of communism. It was just about a decade ago that Dr. Gaidar was the main architect of the sweeping economic reforms that not only freed prices in Russia but also began the process of freeing Russia fr om the shackles of the Soviet command economy. It was no easy task for him. He once famously described the state of the Russian economy, when he took charge in November of 1991, as like travelling in a jet, going into the cockpit and discovering that there is no one at the controls. Ten years later, Russia is not yet a perfectly functioning market economy, but the reforms that Dr. Gaidar engineered and set in motion have put Russia on an irreversible path to a market economy. Despite the occasional rough turbulence, the jet that Dr. Gaidar spoke about at least now has a pilot.

Dr. Gaidar holds a Doctorate in Economics from Moscow State University. From late 1991 until January of 1994 he served in the Russian Government at various times - as acting Prime Minister, Deputy Prime Minister and Minister of Finance. Since leaving the Russian Government in 1994 he has been the Director of the Institute for the Economy in Transition, which is one of the leading think tanks in Moscow, and an active player in the formulation of economic policy in Government circles. He is also a Deputy in the State Duma and head of the political party Democratic Choice of Russia.

Dr. Gaidar has also recently written a book which chronicles the early years of Russia’s reforms, called Days of Defeat and Victory. An English translation was recently published by the University of Washington Press in the US.

We are very fortunate to have Dr. Gaidar here today, to share his very unique perspective and insights on the current state of the Russian economy and business climate, as well as the future of Russia’s reforms.

Without any further delay, it is my honour and privilege to present to you Dr. Yegor Gaidar.

DR. YEGOR GAIDAR: It is a privilege for me to speak to this audience in this institution which has been very active in supporting Russian reforms. The problem is that the field of economic reform in Russia is very broad. Various problems had accumulated from earlier years, so that when we had a new President Elect, with a lot of political capital, and a new Government was formed, it was confronted with a huge agenda of problems. If I were to list them, it would probably take up all the time I have this morning! I shall therefore try to concentrate on a few of the most important areas, on the progress achieved during the past six months and on a few areas which will probably be the centre of attention during the coming six months to a year.

When the new Government was formed, there was intensive internal discussion about the strategic priorities for the economic programme. Generally there was a consensus among the majority of the players that we needed a broad agenda of market-oriented reforms, but there were two different positions. The first position, supported by the Presidential Adviser, Mr Illarionov, was that we should put the greatest priority on radical cuts in Government expenditure and that the Government’s share of GDP should drop from the present 35 - 36 per cent to something like 20 per cent during the next few years. The other position, supported by Gref and Kasyanov, was that the first priority should be the creation of a sensible and good investment climate in Russia, which is essential for long-term growth and not the Government’s share of GDP per se.

The second position generally got the upper hand, and the centre of the Gref programme was the idea of creating a good investment plan and a favourable national climate in Russia. The idea was that we need a lot of investment. We are now investing abroad. There is capital flight. We should not expect anyone to invest seriously in Russia while Russians are intensively investing abroad. The crucial task for us is therefore to reverse the capital flight. To do that, we need a good investment climate. Having a good investment climate means having political stability, a sensible tax regime, financial stability, protection of property rights, et cetera. That was the logic behind the Gref plan. The Government was happy to elaborate and implement this plan in a relatively short period of time.

However, as you understand, it is extremely easy to Draw up a good plan but it can be very difficult to implement it, especially bearing in mind that Russia is now a democracy - an imperfect democracy, a democracy with a lot of problems, but a democracy all the same. It is not enough in real life to just go to President Putin and get him to sign a decree to implement a plan. It is necessary to pass a lot of legislation through the parliament. There are limits on what parliament can do, both technically and politically.

Of course, the enormous difference between the situation now and what it was between 1996 and 1999 is that generally the Government and the President can control the majority in the Duma. But that does not happen automatically. To create a majority for a serious programme, such as tax reform, for instance, is an extremely difficult and time-consuming job. You need a whole range of different influences, pressures, negotiations, et cetera. It is totally unrealistic to hope that, for instance, the Government could create these types of coalition for 20 important pieces of legislation.

Two things were extremely important: first, whether the Government would be organised enough to create these types of coalition; and second, whether it would be sensible enough to choose the top priorities. I think that during the first half of the year the Government proved to be quite realistic in selecting priorities, building coalitions, promoting its programme and achieving serious progress in extremely important parts of it.

Of course, the most important achievement of the second half of the year was the adoption of the second part of the Tax Code and the radical tax reform initiated by that Tax Code. As I am unable to address systematically all of the issues, I shall concentrate on this concrete issue because it is important for an understanding of the realities of the reform process in Russia.

Russia had a very imperfect tax system, but not unusually imperfect. There are similarly imperfect tax systems in many countries, including very developed ones, with a very high marginal tax rate, or loopholes, and so on. The problem in Russia was that in the long history of the evolution of the democracy of taxpayers, this tax system had not evolved. It was not based on a consensus among the majority of players that taxes should be paid, that the state should fulfil its functions, et cetera. Society had not in any way adapted to this type of relationship with the state, with important consequences. The evident result was mass tax evasion, a grey economy, low tax collection, and an impossibility for law-abiding companies to compete, et cetera. A lot of problems in the tax system were evident for years. The so-called young reformer Government tried to promote radical tax reform in 1997, but was halted in effect by the Duma majority.

There were a few extremely important issues that need to be addressed. First of all, very high rates of marginal taxes on wages. A combination of the four different contributions to the different social funds (pension fund, health care, social insurance and unemployment) with a 30 per cent marginal tax rate on personal income tax, pushed the marginal tax rate so high that normal firms working in the commercial sector never paid legal wages. Also there were a lot of loopholes, making it easy to legally avoid all of this nonsense. Hence, a very simple system, with radical cuts in marginal tax rates and elimination of loopholes, was the general idea behind this reform.

We started to work on this tax reform project in 1999. It was a strange time. We had the Primakov Government. It was evident that there were no reforms on the agenda. We had as a starting point the various options which were agreed in 1997-1998. Then we decided to try to forget most of the compromises and draft the reform proposals on the assumption that we would be in a position to impose what we wanted to impose. To some extent it was a joke, especially at that time. It was: “Maybe some time, in the year 2008, somebody will need our proposals.”

Then the situation changed radically, as happens in Russia, and these options, in the implementation of which my friends play a very serious part, were used as the basis for the Government’s proposals: flat-rate personal income tax and elimination of revenue-based taxation, which made legal, profitable business practically impossible in Russia. In Russia you could run a business with profits of 20 per cent and higher, but it was impossible with the revenue tax to run a business in Russia with a normal rate of profit.

Then there was the unification of contributions to the various social funds into one single tax with a single tax base, in one single tax administration. That was the essential point. That was the general framework for the majority of the changes.

But then, if you are trying to push it, you are inevitably in confrontation with the communists, because on ideological grounds they could not support flat personal income tax, even knowing that personal income taxation in Russia was quite regressive. You are in confrontation with the strong regional lobbies, because revenue-based taxes are, first of all, regional taxes. You are in confrontation with the trade unions, which control the social security tax contributions and tax collection. You are in confrontation with the very strong institution of the pension fund in Russia, which has very strong political support.

It is not enough just to have Putin’s support to overcome this coalition. You need to build another type of coalition. That coalition was, first of all, the coalition between general pro-governmental factions, ideological liberals and the very strong oil lobby in the Russian Duma, which was very interested in the elimination of revenue-based taxation. Only the creation of this type of coalition allowed us to push forward this legislation. That was, in my view, a very important result.

The second serious achievement was the redistribution of tax revenues from the regional budgets to the federal budgets. Anyone who knows the structure of the Russian budget will understand that, given the size of Russian debt, and given the responsibilities of the federal Government, it is impossible to have a sustainable financial situation in Russia if the federal Government controls less than 50 per cent of revenues. Somewhere between 55 per cent and 60 per cent is realistic. But in the previous years it was completely impossible to push in that direction. Now the redistribution of the revenue base, with all value-added taxes going to the federal budget and practically all personal income taxes going to regional budgets, will make distribution of tax revenues between the regions more equal, remove many of the distortions connected with value-added tax and significantly increase the tax basis of the federal Government. In my opinion, that was an extremely important achievement this year.

The third point was a major strengthening of federal control over the situation in the regions, reform of the federation council, establishment of federal districts, et cetera. That is, from my point of view, an important step in the right direction. Those who know the situation in Russia know that the excessive power of governors, who often had control over the federal structures and could manipulate both tax police, police, the court system, et cetera. This was one of the most important dangers to the stability of private ownership and private entrepreneurship in Russia. The idea that, if we have a law in Russia, it should be imposed on the entire Russian territory was somehow alien to governors two or three years ago.

During the time when I was closely involved in Russian politics I saw that the power of the governors fluctuated. Sometimes it was enormous, sometimes it was less. It was enormous two years ago. I constantly heard discussions about whether Russia would be split, whether it would stay as a whole, and so on, which was, in my view, nonsense from the beginning. It is now evident that this power is stronger.

That does not mean that I do not see some dangers in these developments. It is, of course, easier to run a unitarian state than a federal state. But Russia can remain a democracy only as a federal state. A genuine move in the division between the functions of the federation and the regions is sensible, but, like everything in Russia, it could easily be overturned if the federal structures tried to unwind the legitimate powers of the regional governments. Until now that has not happened, but the danger is clear.

The next important step - not as radical as I would like to see, as it was based on many compromises, but a step in the right direction - was the reform of our customs tariffs, with significant cuts in marginal customs tariff rates, unification of the structure of the tariffs, simplification of the tariffs, et cetera.

The fifth action, which I believe was extremely important, though politically difficult, was to cut radically the number of those who serve in the Russian army and various para-military institutions by 600,000 over the next three years. This was discussed throughout the last three years of the Yeltsin period but there was never the political will to do it. Now the President has, in my view, been sensible by choosing this as one of the priorities and taking this difficult decision in the early phase of his presidency.

All these problems were extremely important. Priorities were set. There has been substantial progress in all of these fields. That is good news. The bad news is that there are a lot of extremely important problems on which there has been a very limited amount of progress. That is the reality. I would not expect more, to be frank. I think that during the past few months the Government has done more than anyone could realistically expect it to do. What is worse is that there has clearly been a slowing of the process of reform during the past three months. The process was energetic in the first three months but slowed down later.

The Government is now facing a few extremely important problems. I would first stress those which are closely connected with legislation and the parliament. The first is the reform of social protection. The Russian system of social protection is extremely imperfect, though not unique in its imperfection. Essentially it is based on approximately 200 different laws which grant various types of non-targeted social privileges: privileges for those who are old, for those who are young, for those who work in the tax police, for those who are in the military, for those who work in tax inspection, for those who work in the guards, et cetera. But there are only two systems now - one system of housing subsidies and one system of child subsidies - which are based on any kind of means testing.

The Government’s idea is extremely simple, to dismantle all these different types of legislation and have one, simple targeted system of social support. This is crucial first of all for those who are poor, because we have serious problems with poverty in Russia and 80 per cent of social support goes to families which are not poor. The problem is that here also you always run up against different interests. In this case, the Government was unable to create any sensible coalition for these reforms. Nobody really opposes it, but somehow nothing is done. That is partly a result of the compromise on the Duma’s formation reached in the very early days of the Putin administration when he was still facing elections. The pro-Kremlin factions made a compromise with the communists on the distribution of the Duma portfolios, which was politically quite sensible at the time. But, as I mentioned at the time, it had long-term consequences. The communists got control of all the social committees in the Duma: the Social Affairs Committee, the Healthcare Committee, the Education Committee. Even if you have a majority on the floor, it is extremely difficult to get anything done if the main committee opposes the reforms presented by the Government. That applies throughout the Duma, to everything connected with social protection and the labour code. We are still living with the labour code which was adopted in the Soviet Union, if I remember correctly, in 1971. It is absolutely out of touch with reality. To some extent the Russian labour market is extremely flexible, because our legislation is so out of touch with reality. That is why practically all labour relationships are outside the formal law. Nothing is regulated by the law and, of course, the level of real protection for employees in Russia is unbelievably low. You will not find many other countries with such a low level of protection for workers.

What the Government was trying to do was to somehow connect this legislation with reality - not to introduce a very liberal system but to reintroduce some connection between legislation and reality. It is very pro-labour at the moment. Discussions with trades unions have shown that it will be very difficult. The Government virtually had to step back from its own programme in the autumn. Putin discussed this problem last week in a meeting with leaders of the factions and asked them to support this legislation, explaining why it was necessary, et cetera. But it will be a very difficult battle.

On pension reform, there is a sensible programme of gradual transition to a partly-funded system, starting from the year 2002, but nothing has been adopted by the Duma yet.

On banking reform, nothing has been done. As was discussed during the breakfast meeting, I am sceptical for a variety of reasons that much will be done during the next year and a half. Mr. Geraschenko’s term expires in autumn 2002.

Natural monopolies are an extremely difficult subject. On RAO UES Rossii, the good point here is that the leadership of the company wants to restructure and it is open to various strategies and is trying to move in this direction, but it is an extremely complicated matter. There is a conflict between the interests of the regions, regional governors, minority investors, et cetera and a lot of players who are unable to restructure anything but are able to prevent restructuring or at least slow it down considerably. That is what is behind the latest discussions. I believe that nothing will be resolved finally until April of this year. I think that the programme will be adopted in April. I think the basis of the programme will be there, with some amendments, but we shall see. Clearly it will be a slow process. For instance, to seriously change the situation you need to change the federal legislation on the regulation of energy prices. To change this legislation you also have to build a very strong coalition which will be able to support it. To build it now will be very difficult. It is not just a straightforward matter wh ere Putin determines the final solution.

Gazprom is primarily a problem of management. Until we see what the final solution on its management is this spring, I shall not make any guesses about whether we shall see positive developments at Gazprom.

On railways, the good story is that the Ministry of Railways has decided that it is strongly in favour of reforms. Of course, they would like to see reforms which favour the Ministry of Railways: so much is evident. But the very fact that they are in favour of reform creates some basis for hope.

The experience of the first half of the year of this Government shows that it has a sensible programme, sensible priorities and the ability to achieve results. Also the experience of these six months shows that the freedom which existed at the very beginning, in the first hundred days, is over. Now any step forward will be more and more difficult. Our optimism, if we are optimistic about Russia, should be very cautious. We should not expect that the Gref programme will be implemented according to schedule.

The third point is that the most important danger for Russia, as it has been throughout the past 40 years, is connected with the price of oil. The most serious danger for Russia is oil prices at an extremely high level for a long period of time. It is very easy to govern Russia when the oil price is over $30 per barrel.

In the last years of the Brezhnev period the oil price was approximately $60 per barrel, so Russia could compete with the United States, with the nuclear arsenal and the importation of 40 million tonnes of grain. More or less everything could be done. The problem with high oil prices is that it creates problems and distortions which inevitably blow up when the oil price goes down, and it will go down.

High oil prices are not the best environment in which to conduct the serious stuff of market reforms. Generally during this half of the year, the Government was more or less able to control the counter stimulus connected with the higher oil price; it started reform and made a move to control non-interest related expenditure; it was running a substantial budgetary surplus; and it drew up a more or less conservative budget for the year 2001, but it is impossible to hold these pressures for a long period of time. It is easy to be tough when everybody knows that you do not have money. When everybody knows you are sitting on money, it is politically impossible, at least in Russia, to do that for a long period of time. I hope that we will not have very high oil prices for a long period of time in Russia.

Another danger is connected with the fact that oil prices may drop very radically and rapidly and then the country will be confronted with serious stress. It is not evident that the response to that stress will be an acceleration of the necessary reforms.

As the situation is developing now, it looks as though in the year 2001 we will not be confronted with both these dangers. If the oil price fluctuates, as I hope it will, between $18 and $20 per barrel, in the long term. That will be the best possible solution for Russia.

In my view the Government made a mistake in the elaboration of its strategy for the Paris Club and budget for the year 2001. The approach was not to include in the budget the payment of principal to the Paris Club in the hope that there would be restructuring, and to include the IMF loan, even if there was no certainty that we would get it. We would also be extremely conservative about the revenue side and would include reserves in the budget, so that if we do not have the Paris Club restructuring, we will have additional revenues and then we will cover what is necessary.

I think that was a bad strategy and that it would have been much better if the Government from the very beginning had been conservative about financing but more realistic about revenue. It would then have been easier to defend this budget. As a result of this and when oil prices were relatively high, there was a discussion about what to do, whether in this situation to fulfil the obligations to the Paris Club or to work in other areas and start negotiations.

One unpleasant factor was that the discussion was extremely public, but last week the key decisions were made by the President and in my view those were sensible. The essence is that we will eliminate the arrears to the Paris Club, perhaps with some delay connected with legal problems. Then we will start negotiations not on the year 2001 but on the serious problems that will arise in 2002 and more particularly 2003, and try to reach solutions together with the International Monetary Fund and Paris Club countries. We will bear in mind that the American administration will be practically re-formed but, as we will have their policy no earlier than May or June, it would be unrealistic to hope that we will have strategic and long-term serious decisions on this subject before the summer of this year.

Generally, I am modestly optimistic about the prospects for Russia. Many things have been done to support growth in Russia but the country is still confronted by important problems. Before we can say that the major reforms have been dealt with and that we have a sound foundation for sustainable economic growth, we will need to make a great effort and utter many words. (Applause)

MR. McDONALD: Dr. Gaidar will take questions from the audience.

QUESTION: Dr. Gaidar, thank you for a very interesting summary of the state of play in Russia. I am very interested in the micro-economic background in Russia because that was the clue to the devaluation in 1998. At a corporate level, companies were not able to honour their obligations; they were borrowing abroad and not being paid at home, and that helped to undermine the fiscal situation.

It now seems, from visiting Russian companies, that one feature of the current landscape is that companies are prepared to invest on a much longer term timescale than was previously the case.

If you look at the statistics, it appears that capital flight rose over the year 2000 but that, as a proportion of exports, if anything, it actually went down. I wondered what your perspective was on capital flight and on the outlook for domestic investment, because that seems to be one of the key criteria to building a sustainable economy.

DR. GAIDAR: The problem with Russian capital flight is that it is extremely difficult to measure. Of course a lot of work has been done on capital flight. The evidence is that there is a serious problem with that.

To analyse this from the point of view of whether we had a 5 per cent increase or a 5 per cent decrease of capital flight, the statistical foundations for this are not sound enough. We live in a big country with long borders and a very imperfect system of customs statistics and collection of value-added tax which is refunded on export. There is a strong motive to overestimate exports because of the value-added tax, but also to underestimate in order to extract capital abroad. There is evidence of an underestimation of imports. All this makes it extremely difficult to estimate capital flight in a concrete way.

It is easier to estimate the amount of investment. One of the most positive developments in Russia in the year 2000 was that we had a 19 per cent increase in the general level of investment in the Russian economy. That is instructive and shows that we have had some positive changes in the investment climate. Probably a substantial part of this comes from the money that otherwise would go to capital flight. It is important to see whether this positive trend, perhaps on a slower path, will continue in the year 2001.

QUESTION: It has been widely predicted that there is going to be a chill in relations between Russia and the United States. Do you foresee that creating a problem for the reform programme that the Government is trying to implement?

DR. GAIDAR: I will be flying from London to Washington to try to understand what the relationship between the new administration and Russia will be. It would be much easier for me to answer this question if I were on my return trip from Washington!

QUESTION: Dr. Gaidar, I had the feeling in listening to you this morning that all is relatively well with the Russian economy, thanks to the efforts of the Government. It seems that your modestly optimistic appraisal depends very much on this Government continuing to operate. There is, however, continued speculation, as usual, in the case of Russia about the dispute between the Government on the one hand and the Kremlin on the other, particularly as represented by the President’s economic adviser, whom you mentioned only briefly. And that the Government or the Kremlin may have to retreat. That could result in a shake-up in the Government. How much of your assessment depends on this Government staying in place and what outlook do you have with regard to the stability of this particular Government?

DR. GAIDAR: Mr. Yeltsin was regarded in the world as an unpredictable person, which was nonsense in my view. He was very predictable. For me it was usually extremely easy to predict what Yeltsin would do in a given situation.

From this point of view, Mr Putin is much less predictable. I just do not know how he will react to various crises. We have had no experience of his reactions, so we will see. I very much hope that this Government will stay and perhaps with a better structure nothing will happen. I would very much like to have the same Government with the same people who drew up this programme and started to implement it, with all the imperfections, to keep pushing in the right direction.

A serious reshuffling of the Government would greatly impede progress. Inevitably you lose half a year, then it is autumn and the time of the budget. The year is practically lost. I very much hope that this Government will be supported, but I do not know.

QUESTION: Dr. Gaidar, I have one question to you as a member of the Russian Parliament with regard to lending in foreign currency to the Russian Government, local government and private and state companies. Is that still possible and could you give a brief description of the process?

DR. GAIDAR: There are additional limitations to the power of local government to borrow in foreign currency in the amendments to the budget code adopted last year. First, the regulation which needs the approval of the Ministry of Finance is in place. There is an additional factor that they borrow only for the purpose of refinancing existing loans. It is not possible for them to raise additional loans in hard currency if that is not to refinance existing loans.

QUESTION: Dr. Gaidar, during the Yeltsin era, the so-called oligarchs played a major role in the economy and indeed in the political structure as well. Now Putin has said that he is going to change that. What is your view? Is he able to do that and will he? What is the future of the oligarchs?

DR. GAIDAR: Genuinely I think that the oligarchs in the form in which they existed at the height of their power in 1996-97 do not exist any more in Russia. They decided the policy of the state and then told the state what do to with the policy. Now of course we have businessmen who control big businesses and who have some political influence and political connections, but the general structure of the oligarchic society over the last years of Yeltsin’s regime has now gone.

QUESTION: Dr. Gaidar could you elaborate on the reasons for your thinking that banking reform has very little immediate future in Russia for the next year and a half?

DR. GAIDAR: That is because the present leadership of the Central Bank does not have a very strong reputation for promoting banking reform and because I think the present bank leadership will serve until the end of its term, which is autumn 2002.

QUESTION: Could you talk a little about whether or not you think there is a case for Russia to receive some kind of debt forgiveness or major rescheduling of the debt. When you look at the normal parameters or ratio of the debt, it is not so obvious that Russia needs any debt forgiveness. In addition, could you comment on how big a problem you think it would be for Russia’s relations with the IMF and the G7 if the G7, the United States and Germany insist that there should be no debt forgiveness?

DR. GAIDAR: The case for debt reduction is quite evident. The basis is the London Club deal. All the G7 governments during these years have spoken a lot about their willingness to help Russia, and that is splendid. The banks are not charity institutions. They never said much about wanting to help Russia. They wanted to earn money or to get their money back. We had a deal with the banks, not based on charity or on the idea that the deal will help Russia but on how to maximise the banks’ chances of getting their money back. We agreed that this deal is optimal for the banks, not from a political point of view put purely from the financial point of view.

As you know, Russian debt was higher after the deal than before it. If the banks, which are not political institutions and which never declared that they would like to help Russia, decided that is the best possible way of getting their money back, why should governments not follow this example?

As you will understand, this is purely a political question. It will be connected with various other political issues. That is why I do not think it will ever be even seriously discussed before we have the new American administration and know its position, for a variety of reasons, not only economic.

If oil prices are not too low, Russia could live without debt forgiveness. That might solve the problem of the year 2003, even without debt restructuring, but that will seriously increase the financial instability and fragility of the Russian recovery. All the companies that are discussing the problems of investment in Russia will think that is splendid but will ask whether it is financially sustainable. If they are not sure it is financially sustainable, why should they take the risk?

It is not an insoluble problem if there is no debt forgiveness but the estimated rate of growth will be lower if there is not a sensible deal about debt accumulated during the Soviet era.

QUESTION: Could you please comment on your predictions for the success of the energy charter treaty that is currently being debated in the Duma?

DR. GAIDAR: I think that the chances that it will be adopted are relatively high.

QUESTION: Do you have any further comments on whether it will proceed? I think it has been predicted that it will be adopted. As for any of the subtleties of the debate, do you have any comments or thoughts on the success rate, once it is adopted?

DR. GAIDAR: I do not regard myself as an expert in the field, so I would not like to comment.

QUESTION: Dr. Gaidar, there were serious talks about Russian membership of the World Trade Organisation. Can you give your arguments?

DR. GAIDAR: That is extremely important from the point of view of the structural reforms in Russia and the oil price. Membership in WTO will probably be one of the most important issues in Russian policy during the next few years.

Putin is strongly committed to obtaining early membership of WTO. The Russian Government has just finalised the draft of three key documents for the negotiations and they should be prepared before we start serious discussions. One is on the assessment of the amount of support required for agriculture.

Much will depend on the ability of the Government to deal with the enormous amount of important legislation and technical detail connected with membership of WTO. For instance, we need the new customs code because the present one is quite out of touch with WTO membership. It will be difficult to push that through the Duma. For half the year the Government was unable to elaborate on a joint position. It looks as though that will be done during the next two months. I hope that is the case and that it will be compatible with WTO criteria. That is only one subject and there are many more. There are extremely complicated political and technical problems.

There is a possibility for the Government to push the necessary legislation through the Duma. That will not be easy but it is possible. There is a basis for negotiations. There are two problems. The first is how friendly the approach of our partners will be in the WTO negotiations and how interested they will be in our early entry. I hope that will be all right. The second problem is the Government’s ability to elaborate its position and prepare the necessary technical changes.
I think progress in this field has been rather slow. Political declarations will not work. I hope that will be accelerated during this year.

QUESTION: Dr. Gaidar, could you say a few words about what you think Western governments and Western investors could do to help Russia in its current reforms? In that connection, could you comment on the German Chancellor Schroder’s debt equity proposal?

DR. GAIDAR: There are two important problems connected with Russia’s foreign economic policy. The first is early and realistic WTO membership and the second is some kind of solution to the Soviet era debt. From my point of view, those are the two most important problems.

On debt equity, everything depends on the concrete terms of this deal and what at this moment will be the price of Russian securities, et cetera.

QUESTION: Many of the oligarchs’ fortunes were apparently founded upon privatisations that might have been less than transparent. What do you think is the danger that some of those privatisations might be re-visited, perhaps reversed and revived, or have they taken the attitude that what was taken has been taken?

DR. GAIDAR: This problem has been discussed many times in Russia and will be again this Monday at the meeting between the pro-government Edinstvo faction and President Putin. Generally the position of Edinstvo, which usually represents the position of the Government and the President, is that we have to introduce a change in the legislation which will impose an upper lim it on the possibility of revising these types of deal from ten years to three. In my view, that is absolutely sensible.

There are many possibilities for taking away property from companies that are poorly managed, not paying their debts and accumulating arrears before the budget. If we try, through various approaches, to revise the results of privatisation, there will be a complete mess in property relationships and no serious person in this situation would want to invest one cent in the Russian economy. This is an important issue and I very much hope that we will be able to address it. (Applause)

MS. SHEPHERD: Let me thank you very much, Dr. Gaidar. I would particularly like to thank you, as a former legislator myself. I think we have something unique here: we have a reformer and a member of the Duma all at one time and he has reminded us that these reforms are much more difficult to accomplish within the context of a democracy. It is a good thing to keep reminding ourselves about that because it explains why it is a slow, painful process. Thank you again, Dr. Gaidar, and thank you all for coming. (Applause)