Central Banker of the Year: Yam: Hong Kong's sharp-shooter
The perennial worrier
Finance Minister and Central Banker of the Year: The regional winners
Russia's finance ministry has developed a new dynamism under Anatoly Chubais. Confidence in his commitment to reform, privatization and a tight fiscal and monetary policy have led to a surge in investment by foreign fund managers and direct strategic investors. The performance of the capital markets is impressive: equity prices are up more than 185% for the year to date. They appreciated by 20% in August alone, making Russia the world's top-performing stock market.
"The ministry of finance has become the most sophisticated part of the entire central government," says Aleksandr Tolchinsky, a director of Credit Suisse First Boston and one of the leading investment bankers in Russia. "In terms of professionalism, dealing with foreign investors, or even the English language ability of their staff, they run an extremely smooth, polished operation."
Chubais's appointment in March as finance minister and first deputy prime minister made him the third-ranked official in the Kremlin behind president Boris Yeltsin and prime minister Viktor Chernomyrdin. In this dual role, Chubais, 42, who was the architect of Russia's mass-privatization programme for much of this decade, has been well placed to take on the huge challenges of Russia's non-payment crisis, the restructuring of public finances and tax reform. These tasks, which have dogged the country since privatization began, are of such a scale that only a concerted effort by Chubais and his team could accomplish them.
The biggest success has been collecting $2.3 billion of state gas monolith Gazprom's $2.8 billion tax arrears, which enabled the government to keep a pledge to pay overdue pensions by this summer. Dealing with Gazprom involved Chubais in far more political troubleshooting than simply ordering the revenue department to enforce an outstanding debt.
Another major achievement was the politically difficult move of scrapping the original 1997 budget and replacing it with a revised version later in the spring. The old budget would have increased government arrears substantially. A draft 1998 budget, which proposes to cut spending, reduce the number of corporate taxes to 28 from 75 and shift taxation onto profits rather than targeting revenues, as at present, has been submitted to the Duma.
By far the most transparent and fair of Russia's privatizations has also been guided by Chubais. This was the recent sale of 25% of national telecom holding company Svyazinvest for $1.9 billion. It was also the only sell-off to date through which the government has raised a significant chunk of cash rather than simply accomplishing the sticky political goal of changing ownership of state industries. MFK-Renaissance advised the winning consortium, comprising Unexim Bank, Morgan Stanley Asset Management and one of the funds of renowned international investor George Soros.
Writing in the Moscow News, Soros said he had invested in Svyazinvest because he perceived the government was "moving away from robber-baron capitalism to a law-abiding capitalism where shareholders rights are protected. Recent events have confirmed that I was right." His investments in Russia now total $2.5 billion.
Svyazinvest may have marked a new era under Chubais where privatization auctions are won by the highest bidder rather than insiders. The relative transparency of the Svyazinvest deal was in marked contrast to Russia's earlier "loans for shares" scandal in which the government was accused of handing over valuable state assets at rock-bottom prices to well-connected insiders.
The re-rating of Russia by foreign investors since Chubais became finance minister has been spectacular. Not too long ago, Russia's capital markets were seen almost in a third-world context where only the brave, hot-money speculator would venture. Today, the $18.5 billion market capitalization of just one Russian company, Unified Energy Systems, is the same as the capitalization of the entire Russian equity market one year ago. Inflation, which until last year was still rated as the leading concern in public opinion polls, has been tackled head-on. Salomon Brothers estimates the inflation rate for 1997 at 12.5% against 22% in 1996 and 131% in 1995. The rouble has stabilized, trading between 5,700 and 5,900 to the dollar for the last four months.
James Dannis, managing director and chairman of Salomon Brothers' Russian subsidiary, puts to rest the outdated perception that Soviet-style government bureaucracy has thrown a wet blanket on investment banking deal-making in Russia. "Given the level of development of Russian industry so far, there have been actually a lot of deals," he says. "You have to remember that the capital markets in Russia only came into existence a few years ago. The government is in an ongoing process of developing financial regulation all the time. As far as we're concerned, there are no problems working with the ministry of finance."
Foreign governments have been enthusiastic about Chubais's plans and accomplishments. At the G7 Denver summit in June, agreement was reached on Russia's entry into the Paris Club of bilateral creditors. Completion of the London Club agreement is expected before the end of the year and the settlement of all old Soviet foreign trade organization obligations should be completed in early 1998. The IMF in May approved a $2.8 billion extended fund facility and the World Bank expects to provide some $6 billion over the next two years for structural reforms.
Chubais's campaign for reform and the creation of an open, stable economy has also won support from within Russia's financial elite. Maxim Shasenkov, a Russian analyst at Merrill Lynch who will shortly take over as head of sales and trading at Alfa Capital, explains: "After Yeltsin became ill, Chubais emerged as the buffer between different vested interests. All through his career, he has managed to stand well above the many powerful competing factions in Russia. He is politically strong enough not to owe debts to anyone, thus enabling him to put national interests above clan interests ... I think he is the most professional economist and financier in the entire country. In one or two years from now, if he manages to create a nationwide recovery - not just within Moscow and the capital markets alone - he will be a credible presidential candidate."
In Russia, however, success can come at a terrible price when powerful criminal groups feel their positions threatened. Late in August, Chubais's colleague Mikhail Manevich, vice-governor responsible for privatization in the St Petersburg region and an outspoken supporter of the government's upholding of law and order in the economy, was machine-gunned to death in daytime on Nevsky Prospekt, St Petersburg's main boulevard. Chubais, who speaks fluent English, has a PhD in economics from St Petersburg Engineering and Economics Institute and rose to prominence through the city's administration before being enticed to Moscow by Yeltsin in late 1991 to head the privatization programme, vowed to bring the killers to justice and to maintain the reform momentum.
"We're not leaving them any middle choice," said Chubais of those responsible for the killing. "It is either us or them. There is no middle ground. I want to say to those who pulled the trigger and those who paid for this with their dirty, stinking, stolen money, we will get you. Now or later, quickly or in due time, we will get all of you."
Tough words from a tough minister. Theodore Kim