|
The Russian Duma has enacted a flurry of reform bills in recent months |
||||||
The wait is over. The Russian government is for the first time making a considered and systematic attempt to reform the economy and put in place the market-oriented mechanisms that will enable it to grow. Since the end of the summer, there has been a constant stream of laws and plans from the economic development and trade ministry (MinEcon), headed by economics tsar German Gref, which is overseeing the reform process.
Any start at all is good news in Russia after a decade of neglect. But, for all the good intentions, the programme has not progressed smoothly. The most severe challenges of reforming banks, natural monopolies and land laws were already proving difficult only three months into the process. And if the government cannot keep up the pace, then the relative economic prosperity Russia is enjoying will peter out and die, as oil prices dip and the last benefits of the 1998 devaluation are eaten away.
In the past, attempts to change the system were over-ambitious and doomed to failure, discrediting the reform process with the people.
This time – for the first time – a more modest plan, drawn up at the start of last year by the Gref team, has turned into a month-by-month list of things to do for the cabinet, which has been more or less sticking to the schedule.
By mid-October, Gref was able to report that 19 of the 20 laws that were supposed to be put in front of the Duma were there. The missing item was the preparation of the policy for the efficient expenditure of public funds.
By the end of November, the MinEcon was gearing up to prepare 30 more draft laws and submit them to the Duma. These should tackle some of the thorniest problems, the most troublesome of which will be reforms to Russia’s overbearing bureaucracy: that’s difficult because the system is being asked to change itself.
Naturally, not everything is going according to plan and there have been some holes in the road, but the mere fact that the government is attempting to work its way systematically through problems that were barely mentioned under Yeltsin is in itself extremely encouraging.
Add to this the fact that Gref has increasing clout in the political clan wars (see article: “Two Putins juggle three Kremlin clans”) and analysts are beginning to be optimistic. At the start of the Duma’s summer recess, the St Petersburg clan of liberals led by Gref was the weakest force on the field. But as the summer came to an end, the MinEcon had won some hard battles. Gref clearly now has the president’s backing.
Not only is the MinEcon submitting sensible laws, a docile Duma is passing them – another first for Russia. Boris Yeltsin had to ram virtually every measure he came up with down the communist-dominated Duma’s throat, but Putin enjoys considerable support in the lower house of parliament. For the first time, laws are being considered and debated on their merits and not turned into political weapons that both sides use to bash each other.
The implementation of the Gref plan is split into three parts: the short term (through to the end of 2001), the medium term (over the next four or five years), and the long term. The cabinet to-do list deals directly with the short term, tackling the most immediate issues first.
Altogether, 119 measures are projected for implementation over the 18 months ending in December 2001. These measures are spelt out in a total of 163 draft laws and regulations, of which 78 were expected to be prepared by the end of 2000.
Publicly specifying set numbers of measures to be implemented smacks of pragmatism. Making the heads of the departments personally responsible for putting the new rules into effect should also make them effective. Both central planning and Yeltsin-era attempts to reform ground to a halt partly because no-one was willing to take responsibility for any action, fearing that their signatures would end up on a document that would come back to haunt them. It is a bureaucratic legacy that Russia is still struggling to overcome.
The new programme explicitly states that “the heads of ministries and agencies bear personal responsibility for the implementation of the economic reform plan”, and progress reports are due on the eighth of every month.
Although the blizzard of new laws and regulations is a welcome sign of life after a decade of moribund decay, the laws in themselves do not guarantee economic growth. Nor does the willingness to attempt reform mean that reforms will actually be made.
By end-November it was clear that reforms to the natural monopolies were getting bogged down in political infighting; land reform and banking reform had effectively been put off until the start of 2001; and the bureaucracy was doing everything it could to shoot down deregulation. But an important first step has been made.
The race has begun and the reform process has set off at a fast pace. But the course is a long one to sustain this rate of change. Over the first quarter of 2001, more new initiatives will be taken and a second attempt made at the more difficult ones fluffed in 2000. Another 100 measures are on the agenda.
The rest of this article analyzes the monthly progress of reform.
August: the budget month
One of the first things Vladimir Putin did on coming to office was to push through a reform of the tax code, which was passed by the Duma at the end of July. It was a rush job, as it had to be passed before the Duma deputies left on their summer holidays if it was going to be incorporated into the 2001 budget, which was debated in the autumn of 2000.
At the time of writing, the budget law was undergoing its penultimate reading and it was expected that it would almost certainly be passed before the end of 2000, making it only the second budget in 10 years to be passed on time and the first ever to call for a zero deficit. In the past, the government consistently ran deficits of about 8%, financing the gap with sovereign treasury bills including GKOs and other securities.
The autumn reform programme kicked off with more reforms on how the federal budget is spent. In general, tax revenues are to be centralized and then distributed through a federal treasury system, making the regions more accountable for spending. Already six regional treasuries have been set up, with the biggest net debts to the centre. But a regional treasury network covering the whole country will not be complete until the end of 2001.
The changes to the tax code have also built in measures that move more control to the centre. For example, regions used to be allowed to keep 15% of value-added tax, the single-largest component of budget revenues. Under the new code, 100% of VAT will be collected by the federal treasury. The 15% that the regions used to take will still be given to the regions, but now it will be distributed through the regional treasury system.
The goal of the budget reforms, according to MinEcon, is to: “develop a concept of efficient budget expenditure; to concentrate federal budget resources for allocation to key economic targets and simultaneously cut inefficient spending; to ensure budget transparency requirements are met and budget procedures are followed; and to complete the formation of the federal treasury system”.
In the past regional governors saw budget funds as free money to spend on making their offices beautiful. The buzzword in Siberia now is “targeted”.
September: the customs month
On September 7 2000, the government reviewed trade regulations and approved an extensive reform to the customs system that was due to go into effect on January 1 2001.
|
The government admits Russia’s customs service is corrupt |
||||||
In general, import tariffs will be reduced and unified, and the customs system will be simplified with the aim of stamping out rampant corruption.
The signing off on customs reform closes a chapter on dealing with the problems of customs. Traders say that the loopholes in the code have been tightened steadily over the past year, since Putin took office.
The maximum tariff is to be reduced from 30% to 20% in steps of 5% and the number of tariff categories will be reduced from the current 96 to between five and 30.
“The reforms are great,” says Niina Pautola, head of the Russian-European Centre for Economic Policy. “The fewer duties there are, the less corrupt the system is.”
As with the tax code, the logic behind these reforms is pragmatic. Russian citizens now enjoy a flat-rate income tax of 13%, one of the lowest in the world. For the poorest, this level is actually one percentage point up, but 13% was chosen as that is what the tax service, on average, actually collects. Likewise, the new average import duty of about 10% is what the customs service actually collects from imports.
The rationale is that a simpler regime will yield a bigger tax take as more traders import legally. An awful lot has been slipping through the net. For example, an estimated 2 million television receivers are imported annually to Russia, but last year the statistics committee registered only 12,000 arriving legally.
More important than the new rates is an attempt to control the excesses of customs officials. Everyone knows that the customs service is riddled with corruption – even the government openly admits it – so part of the reforms includes computerizing the system, enabling some sort of central supervision. The first machines have been installed in Moscow, but full computerization of the customs service will take a decade and cost hundreds of millions of dollars. Still, at least the government both recognizes the problem and has made a start on a solution.
October: the banking month
October was the month when banking was tackled and marked probably the greatest disappointment. Banking reform stalled before it even got started. Instead the debate descended into a row over the legal status of the Central Bank of Russia.
The Gref team have suggested liberal ideas and over the first half of 2001 would like to see: the regulatory and enforcement powers of the CBR broadened; the competitiveness of the banking sector increased; and protection of minority investors and creditor rights enhanced.
For all the progress in other areas of reform, banking is one place where Gref hasn’t been given any clout and the CBR rules supreme.
Under the 1993 constitution, the CBR has to be independent of the government, but there have been moves by the government that suggested it would like to put the CBR under more direct control. In October, it was stripped of the right to register new banks, ending a four-year turf war with the Federal Securities Commission, which regulates the stock market.
Despite its appalling record in regulating the banking sector – effectively an absence of regulation – withdrawing the CBR’s independence is not the answer. Indeed debate is somewhat futile, as its status is set out in the constitution. However, the acrimony surrounding the debate shows how politically sensitive the whole topic of banking is. When drawing up the banking reform plans last spring, Gref’s team tossed banking reform around the room like a hot potato, according to one participant in the meetings.
The row over the CBR is a distraction from the main point. The CBR needs to be tougher on commercial banks and strip the deadwood out of the sector. No more than 300 of Russia’s 1,400 banks are solvent following the 1998 blow-out. The rest are walking dead and long ago stripped anything of value out, sending it to new parallel banks.
For the moment, the government is content to leave a solution until later. In the meantime, the banking sector will be regulated by letting the state-owned banks, of which there are about 460, dominate. Regulation will be done by phone calls, rather than anything as messy as laws. (see article: “Too many banks doing too little”).
November: natural monopolies and hyper-regulation
By November, the cabinet was starting to deal with the real meat of reform, the things that are going to make a big difference. The month of monopolies and regulation shows how hard it is going to be from now on.
Until November, the reforms had dealt with purely economic matters. Changing the rules about tax rates or import duties does not affect the balance of power much. But breaking up national power company UES, and state-owned gas monopoly Gazprom certainly does. And Putin already seems willing to curb his otherwise radical tendencies in favour of reaching an amicable political settlement. Consequently, progress has been slow in proposing changes to Gazprom’s and to the railways ministry’s structure – both of which were delayed – although reform at UES is moving ahead a little faster (see article “Tackling natural monopolies proves a tough task”).
Cutting through all the red tape of the Soviet bureaucracy poses a different problem. Oleg Vyugin, one of the authors of the Gref plan, talks about Russia’s “hyper-regulation”, which is strangling commerce. But the rules – some of which date back to 1950 – give the bureaucrats their power and allow them to supplement with bribes the couple of hundred dollars they earn a month. The very bureaucrats that are being called on to implement a new system will do everything in their power to derail reform.
It is here more than anywhere else that Putin’s centralized control and vertical structure of political power could make a difference. Under Putin, the heads of department are more clearly defined and owe their jobs more directly to their seniors. So, in theory, orders will travel down the chain of command more efficiently. If something doesn’t get done, then there is someone to blame.
Again the Gref plan tackles real issues: currently more than 500 activities require government licences. For example, you still need to get a government licence to make street and road maps. Under the new plan, the number of such licences will be reduced to between 50 and 100.
Companies are plagued by a constant stream of inspectors, each asking for a bribe to certify a business as “safe” or “healthy”. In all, there are more than 10 inspection agencies, not including those set up, illegally, by regional authorities. The MinEcon wants to cut the inspections down to one a year and roll all the agencies into one body.
Finally a one-stop window for registering new businesses will be set up early in 2001. Today would-be businessmen have to spend months trailing around the various state agencies collecting paperwork in order to register a new business. If the new business requires construction, the process can take up to two years.
December: social spending month
December was also a tricky month, as the first reforms were due be made to social spending. President Putin has been riding high, with strong public support. His approval ratings are consistently above 65%, a level that would make any western politician envious, and this public support is the foundation on which his power is built.
Cutting social spending and reducing many of the perks left over from Soviet days, such as free housing, education and health care, will cut into his good standing with the citizens of Russia. Social spending is another area where economic reform cuts directly into political power. It is not certain that Putin has the political will to wield the knife with sufficient vigour.
But something has to be done as, despite the recent bout of economic growth, Russia will face a demographic crisis in the next decade if these reforms are shirked.
“We are expecting the ratio of pensioners to workers to increase to the point where the number of pensioners will be bigger than the number of workers after 2015,” says Arkady Dvorkovich, Gref’s adviser. “If we keep the current pension system, the level of pensions will fall substantially in real terms in this case.”
Reforms to the pension system are desperately needed. At the moment, the state pension fund’s (SPF) income from social taxes barely cover its outgoings, though even this is an improvement. For much of the past 10 years the SPF has been unable to pay pensions fully or on time.
Employers are currently required to pay a whopping 28% of wages as a social tax. This money is then divided up between various organs such as health, unemployment and pensions. Under the Gref plan, these bodies will be subsumed into a single agency in order to cut costs.
From 2002 a new system of individual accounts will be phased in, whereby 2% of a worker’s wages will be paid into a personal pension account at the SPF to guarantee that person’s pension payments. The level of contribution will be slowly raised to 10% over the next eight years.
New laws on medical and social insurance programmes are being prepared and are being sent to be approved by the cabinet. There will be a transition period of one to two years and the new programme will start in 2003.
“Most of the spending goes on health. Medical insurance should be a standard product [meaning that basic medical services are guaranteed through the whole territory of the Federation],” says Dvorkovich. “Therefore the financing needs to increase, which means that the regions need to contribute too. Now there is a lot of regional spending on health, but there is no attention to the standard product.” He promises: “The new system will be much more targeted to the people who really need this help.”
