| Mikhail Kasyanov | ||||||
The 13 white plastic telephones on the receptionist’s desk – none with dials – show this is the office of a very powerful man. An old Soviet status symbol, the array of phones is equivalent to the bars on a general’s shoulder. Most important men have maybe half a dozen.
Mikhail Kasyanov has enjoyed a meteoric rise since he was plucked from obscurity in the state planning department eight years ago. The dark-wood-panelled office in a wing of the White House overlooking the Moskva river belongs to the Finance minister, a job Kasyanov was given in May 1999. Kasyanov is many analysts’ top tip for the post of prime minister in Vladimir Putin’s new government.
An acknowledged expert on external debt and with a reputation for tough negotiating, following his appointment, some in Moscow wonder if the ebullient and charming minister’s experience is too narrow to take on the job of running Fiscal policy.
Born in 1958 in a town near Moscow, Kasyanov began his career as an academic, specializing in transport economics, but in 1992 was headhunted by Boris Fedorov, then Finance minister, and set to work in the economics ministry as head of the department dealing with economic integration with the industrialized nations.
It was the beginning of a rapid rise. Only a year later he was asked to join the Finance ministry, where he eventually headed the team that created the system that controls Russia’s external debt.
“At the end of 1993 there was no system at all as each member of the government could issue guarantees and no-one knew how much Russia owed,” says Kasyanov in a deep, gravelly voice. “Since that time we have established a monitoring system – now only the MinFin can issue guarantees.”
Regions were borrowing money from abroad willy-nilly but Kasyanov imposed some order and followed through in November 1996 with Russia’s First billion dollar Eurobond, the First commercial paper the sovereign had issued since 1913. At the time the Eurobond was heralded as Russia’s return from the cold.
The euphoria following several Eurobond issues didn’t last long. By 1998 Kasyanov found himself at the negotiating table again, this time facing down irate investors who had watched as the Russian government defaulted on more than $20 billion of treasury bills, or GKOs, in the wake of the rouble’s devaluation in August 1998.
In what has been called “the most miserable deal in history”, 19 foreign banks, representing investors, went into the talks hoping to get 50 cents on the dollar back, as had happened in Latin America previously, but walked away with pennies on the dollar, much of which is still trapped in Russia in the special “S” accounts at the central bank. With the economy in free fall, Kasyanov was dealing with a strong hand. Investors were happy to take anything he could offer.
It was in these talks more than anywhere that Kasyanov made his name. The negotiations were messy and unpleasant, but not only did he win a good deal for Russia, keeping the powers that be at home happy, he also made friends with opponents who regard him as a hard negotiator, but someone that speaks their language.
“He is a man who knows what it means for his country to have a standing in the international Financial markets,” says a German banker who participated in both the GKO and London Club talks. “He is good at translating this to meet the needs of internal [Russian] politics. He has a much better grasp than anyone else still in government of what needs to be done. We can talk to him – although this doesn’t mean that we will be able to get him to do what we want.”
More recently Kasyanov pulled off the same trick, restructuring $32 billion of Russian debt to the London Club of commercial creditors, where a third of the sum was written off and the rest restructured: Russia gets a seven-year grace period at generous below-market interest rates before payments resume.
Kasyanov received some criticism domestically as opponents said the London Club deal left Russia on the level of an African country, hurting national pride, but no-one doubts Kasyanov’s ability at the dealing table.
In May 1999 Kasyanov replaced Mikhail Zadornov as the Finance minister. A Swedish diplomat travelling with him at the time of the announcement said that he was naturally nervous about the increased responsibility, but has tackled the task with his customary energy.
His job has been made easy by the relative boom in the Russian economy since devaluation and he reels off a string of Figures to underline the point. Since Yeltsin’s resignation the economy has been on the mend, driven by high commodity prices and the effects of a cheap rouble. The question economists are asking is: is this simply a commodities-driven upswing or representative of structural change? Kasyanov argues that Russia has learnt its lesson. A conservative plan of economic stabilization and reform will be crowned next year with a return to the capital markets.
“We don’t exclude the possibility of returning next year,” says Kasyanov. “Of course a lot depends on our progress in reforms. First we need to achieve macro-stabilization, and secondly structural reforms to show to ourselves and to the country and to foreign observers that improvement in the economy is based not on temporal macroeconomic stabilization, but on fundamental issues.”
Investors are sceptical, since in the past when Russia has received a breathing space, nothing has been done about reform. Why should this time be any different? Kasyanov stresses that Russia will not return to the complacency that it has shown in previous upswings nor to unsustainable policies like the GKO pyramid. “We have already achieved a lot over the past year, but I can’t say that there is already a fundamental strong system,” Kasyanov says.
No rush to borrow
He talks at length about reforming the tax code so that it will work without constant government intervention and about stabilizing the macroeconomic environment. “If we do this then I believe the yields would shrink on bonds,” he says, “and then we will come back to the market. Right now we believe that we have to live without prudent borrowings, because of the negative effect that Russia’s crisis created on the population and we have to restore all confidence. That is why we don’t want to create the impression that as soon as the opportunity appears to borrow we immediately jump in. We have to create the appropriate basis so that everyone assesses that Russia is more conservative and that Russia wants to make foreign borrowing on the basis of very weighted and conservative debt management and overall macroeconomic policy.”
Russia under a conservative leadership where economic stability, not the interests of a well-connected inner circle, is paramount? It is what investors have wanted all along and Russia has never been able to produce. Putin has said little about how this will be achieved, but both he and Kasyanov talk about the need for “strong government”.
“When we talk about the strong state it means the state should be stronger in developing the rules of the market economy and ensuring that these rules are followed by everyone to develop opportunities in the country for business,” says Kasyanov.
One of the proudest boasts of the interim Putin government is that barter has decreased dramatically. Since the devaluation of the rouble in 1998 tax receipts have boomed and surpassed the budget plans, with an increased cash component being the most dramatic change.
With money pouring into the state coVers, part of the state’s plan is to increase the judiciary’s salaries and so break their dependence on local authorities for funds and so make them more independent. More direct methods – such as arresting people – Kasyanov says are the responsibility of other organs such as the interior ministry.
Kasyanov is not proposing a radical tax reform but a step-by-step process to bring the Russian tax code into line with the rest of the world. Already at the beginning of March he announced some long-awaited measures.
Enterprise expenditure on such things as training and advertising will shortly become deductible. Other taxes, such as turnover tax, will be abolished as the Finance ministry concentrates on more direct taxes for raising revenue.
Real tax reform is more likely than at any time since 1991. Under Yeltsin, changes to the tax code were routinely bogged down by a hostile Duma dominated by the Communists. But with the pro-Kremlin Unity Party as the dominant faction, following the parliamentary elections in December, it seems possible that bills will pass through the legislature more smoothly. The prime minister will play a key role in the process of translating Kremlin policy into laws that can be passed by the Duma. Before the business of putting reforms into effect gets under way, the government’s First goal will be to ensure tax collection by what are known as the “individual” taxpayers – Russia’s 10 largest companies. These contribute more than half tax revenue. Gazprom alone accounts for more than a quarter.
“Last year we managed to achieve considerable progress in this area,” says Kasyanov. “For instance monetary payments in Gazprom are up to 40% and UES up to 40% and in MKF [railways] more than 60% and in Transneft more than 80%.
That is already a serious improvement,” says Kasyanov.
By concentrating on the big companies, there is a danger that the small and medium-size enterprises (SMEs) will be ignored again.
Under Yeltsin the small amount of economic growth and new job creation was driven by SMEs, despite – rather than because of – government policy. SMEs complain that they are constantly hassled by either tax police or local mafia. Without political support small businesses are either forced to work illegally – bribing tax officials to keep them off their necks, paying city government officials to stop random Fire inspections, and spending money to jump every regulatory hurdle – or go under.
Kasyanov seems vague on this point, suggesting that once again the SMEs are going to be forgotten. He talks about small business using the Soviet term “speculators”: small businessmen unfairly profiting from the shortcomings of the system.
He argues that SMEs were only set up in recent years to earn profits of 100% plus, rather than aiming for a more “normal” 10% to 15%, as in the west. Under the new tax regime Kasyanov predicts that the high profits will fall to these more normal levels. In the west, he says, competition in a “normal” economy drives down profits rather than taxation.
With a more rational tax structure in place, competition will indeed drive down the profits of “speculators” but this must be accompanied by an anti-corruption drive, which Kasyanov says is beyond his authority at the moment.
Another area of badly needed restructuring that is glossed over is that of the banking sector. Kasyanov was appointed the head of Arco (Agency for Restructuring Credit Organizations) at the beginning of the year, but passes the buck of implementing reform to the central bank. It is true that the central bank is the regulatory authority, but it has been spectacular in its failure to do anything with the beleaguered sector.
According to Kasyanov, Arco’s role is to restructure the banks handed to it by the central bank, but with insufficient funds there is not much Arco can do. It seems that Russia’s banks are to be left wallowing in the mire a while longer, as the political will to do something has yet to arrive.
Problems of scale
“The banking sector – that is a real headache,” says Kasyanov. “The economy is growing and would have sustainable growth, but very soon we will be faced with the even sharper problems of the banking sector as there is no real banking intermediation business in the economy. The problem with Arco is that it has very few funds and cannot operate on a large scale as the authorities don’t have the funds to allocate to it.”
In the meantime, Kasyanov still has some important jobs to Finish. The London Club negotiations were a big success for Russia and he faces a similar set of negotiations with the Paris Club (sovereign creditors) this November, where he says he is hoping for similar terms.
With these two deals out of the way, coupled with the strong economic performance expected for this year, Kasyanov is hoping that Russia will have sufficiently bolstered international confidence for it to issue a Eurobond some time in 2001.
Relations with the IMF are good and Russia is more than meeting all the terms agreed with it at the start of this year. With the presidential elections over, a new deal will be worked out that Russia should be able to meet and Kasyanov believes payments of tranches of the $4.5 billion stabilization package should resume before the end of the year.
The news is mixed. Many of the reforms that Kasyanov talks about could make a real difference, but it comes down to just how they are implemented. Foreign investors want, above all else, to see the rule of law and transparency.
“What I am sceptical about is that during his First tenure in the government [Kasyanov] was not famous for making decisions,” says Boris Fedorov, who gave Kasyanov his start at the top. “He is famous for spending all his time in London and Frankfurt.”
The consensus seems to be that Kasyanov is a competent pair of hands and understands economics well enough to make a difference for the better. But everything depends on Putin.
Fedorov thinks that Putin has his heart in the right place and that Kasyanov has enough economic nous to put a reasonable plan into place. But the obstacles remain formidable.
“I am very optimistic for the short term,” says Fedorov, “cautious in the medium term and who knows what is going to happen in the long term?”
