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As I write, Russian troops are
preparing to blast and occupy the Chechnyan capital, Grozny. As a
result, G7 governments are putting pressure on the IMF not to
release the next tranche of funds promised under the credit
facility agreed after the collapse of the rouble in summer 1998. At
the same time, Russia's politicians are gearing up for a
parliamentary election.
Ironically, all these uncertainties about Russia's future are
happening after a year in which much of Russia's past economic
disasters have been reversed. Russia is riding high on the wave of
the world's cyclical economic recovery. Inflation is coming under
control. Tax revenues have almost doubled and the budget is close
to balance. The share of net exports has surged from close to zero
in early 1998, to nearly 15% of GDP. This has helped lift the
country's GDP by 1-2% this year. The rouble devaluation has created
a cushion of competitiveness for Russian exporters. And, with oil
prices rocketing, export revenues will remain high for the
foreseeable future.
Almost overnight, the country now has the resources to
implement a sustainable economic strategy for reviving growth in
the long term. A strong rouble will restrain inflation and lead to
lower interest rates. And the stronger the rouble grows, the more
trusted it will become. Ultimately, that will help to discourage
capital flight (still running at $15 billion a year, with a
cumulative $120 billion since 1993), stimulate domestic savings and
attract inward FDI.
A London Club debt-restructuring deal is also likely to be
finalized some time early in 2000. This settlement will clear all
the outstanding debts left over from the Soviet era and establish
Russia's creditworthiness on a firm footing.
Unfortunately, the war in Chechnya has soured sentiment. Will
Russia ever enter the body of civilised nations, where there is
rule of law, transparency in financial affairs and compromise in
foreign policy? That's the question that some are posing?
I think there's a very good chance. First, the West cannot
indefinitely adopt a tough policy on refusing to help Russia
economically. Currently, Russia owes $16 billion to the IMF. The
present regime paid back $3 billion in 1999 and has honoured all
its multilateral agency and Eurobond debt obligations. A hard line
with Russia risks promoting an aggressive nationalist regime in
Moscow that would default on IMF debt. And it would put huge
obstacles in the way of foreign diplomacy.
Second, this year Russia is set for some wrenching changes.
The parliamentary elections most likely gave a majority to the
centrists, led by former premier Yevgeny Primakov and Moscow's
mayor Yuri Luzhkov. And this summer (or earlier) Russia will
probably replace Yeltsin with a new president of similar ilk. For
the first time, those who control the levers of power will share
the same interests as those that are governed.
If the new politicians remove the Yeltsin "family clique"
from power, and that's what I expect, it will be the first step in
re-establishing the rule of law in Russia. Russia needs its current
leadership like a hole in the head. It operates only for the
benefit of a handful of Kremlin acolytes. They, in turn, act only
to preserve their hold on power.
To complete the circle of vested interests, the state created
a bond with the industrial and banking sector "oligarchs".
Together, they screwed the rest of the nation. While wages,
pensions and social benefits were left unpaid for months, billions
of dollars were allowed to flee the country -- sunk into the shady
offshore bank accounts of the "chosen". Laws were made to serve
this small group of people.
The bombardment of Chechnya and repayment of wage arrears,
the indexation of pensions and a high-cost election campaign all
represent a last bid to hold onto power.
In its campaign for the parliamentary elections, the Kremlin
was hoping to maintain a fractured Duma that is incapable of
undermining its own candidate for president (standing premier,
Vladimir Putin). The primary goal has been to discredit Primakov
and Luchkov, using the influential Kremlin-controlled media.
At the same time, the ruling clique aims to boost Putin's
popularity as a "caring defender of the weak". And to garner as
many votes as possible, any remaining wage, pension and social
benefit arrears will be repaid. The war in Chechnya will go on for
as long as it takes to support Putin's image as a tough and
decisive leader fighting international terrorism.
But the Kremlin is fighting a losing battle. Russians have
finally realized that, without the rule of law, there is no chance
of a better life. And its resurrection can only happen with a new,
credible leadership. It needs to be trustworthy and capable of
reaching a sensible consensus among all social groups.
So there's a good chance that the new administration will
come into office in the next six months that will finally implement
the structural reforms that Russia so badly needs.
For economic success depends on national trust. Russians have
been conned too many times both by government and by the banks.
That's why only a government of national trust, supported by the
President and a majority in parliament, will be able to counter
such deeply-embedded cynicism.
Legal reforms will be critical. These include the full
implementation of new (and unambiguous) legislation on banking
reform, deposit guarantee schemes, bankruptcies, financial
reporting procedures, taxation and the protection of shareholder
rights. Of course, for a long time to come, it will be impossible
to consider investment in Russia anything other than "high risk".
But now that risk is increasingly complemented with potential high
return.
David Roche
is president of Independent Strategy, a research firm based in
London. www.instrategy.com
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