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Russia: Experts Say Not All Is Rosy In Flowering Economy

  • Nikola Krastev

High oil prices have helped keep the Russian economy humming over the last year. This and the political stability in the country led to a resurgence of interest among Western investors. Moscow is now making regular debt payments and is even pre-paying some of its financial obligations. These trends were highlighted during an investors' conference in New York on 14 March. But experts warn that Russia continues to function on shaky foundations.

New York, 15 March 2002 (RFE/RL) -- Russia is attracting the interest of investors, based on steady economic growth, but concern remains about the country's failure to enact deep-rooted reforms.

A conference that attracted more than 300 investors in New York heard experts on the Russian economy warn about the need for further reform.

Among those balancing optimism with caution was Boris Nemtsov, a former reformist deputy prime minister of Russia and now leader of the Union of Rightist Forces in the Russian State Duma.

Nemtsov spoke about the importance of Russian membership in the World Trade Organization, which he expects will occur in the next few years. Nemtsov expressed great confidence in the vibrancy of Russia's private sector. He told the conference that in terms of private-sector productivity, Russia rivals or even exceeds the most powerful Western economies.

"The private sector in Russia generates about 80 percent of GDP [gross domestic product], which is larger than in France, larger than in Germany and, of course, larger than in Poland and the Czech Republic. Russia is a more capitalistic country than most European countries, and it looks [more like] the United States," Nemtsov said.

But other participants in the conference pointed to strict government control on crucial aspects of Russia's financial system.

Dominic Gualtieri, who is managing director of Alfa Bank in Moscow, said Russia's central bank has done relatively little to push forward banking reforms. He said mandatory deposit insurance is key to placing both the commercial banks and big state-owned banks under more equal footing.

He said it will be at least two years before mandatory deposit insurance is implemented and that once it is done, it will help shift more assets from the giant state savings bank Sberbank and diversify the banking systems' strongest players.

The move to international accounting standards is another sticky issue in Russia's banking system, Gualtieri said. Russian companies want to access the international capital markets, but Gualtieri said Russian banks are only moving in that direction -- that is, toward more transparency and reforms -- in those instances where they want to attract capital through eurobonds and syndicated bonds.

"If you compare, for example, Poland, in [its] top 10 banks, there's not one Polish-owned bank. In the top 10, they are all controlled by foreign, international banks. In Russia, it's a completely different picture, and it will be some time before foreign banks come in a meaningful way into the Russian banking system," Gualtieri said.

Another conference participant, Helena Hessel, is a director at Standard & Poor's, a major U.S.-based credit rating company. Hessel said that for 15 months (December 2000 to March 2001), Standard & Poor's improved Russia's credit rating five times. But she said that for the next year, Russia's credit rating will be a solid BB- rather than the more favorable BB rating anticipated by Russian bankers.

The Standard & Poor's rating system evaluates creditworthiness from AAA, the highest, through BBB to CCC, the lowest, with a "plus" for an improved outlook or a "minus" for a worsening outlook.

Hessel said the main reason for Russia's credit improvement is the Judiciary Law Reform proposal introduced in the Russian parliament in 2001.

"We at Standard & Poor's believe that Russia's judiciary system is so corrupt and so bad that unless it will be reformed and the reforms implemented, the various reforms which Mr. Nemtsov and other people mentioned will not be implemented, which is necessary for this rating to go to double B minus rating and then maybe even higher," Hessel said.

Nemtsov, a critic of Russian President Vladimir Putin, told the conference that political stability in Russia should not be confused with democracy. For most Russian people, he said, there is a difference between stability and democracy. Nemtsov said the real hope for Russia's re-emergence as a world power lies with the so-called "new generation" -- those not tainted by the old Soviet system.

"The private sector generates not only growth but a new style of management. Fortunately, there are a lot of 'new generation' people in businesses, not only in big business but in small and average businesses, [and] not only in Moscow but in the rest of the country. And I think that this is the real hope of Russia. I don't believe that Putin and KGB guys are real hope of Russia. The real hope is the new generation," Nemtsov said.

Nemtsov said two major reforms have to be implemented to attract a large number of Western investors in Russia. The first, he said, is tax reform that looks like a "real revolution." He expressed confidence in a reduction of the value-added tax from 20 percent to 16 or 17 percent during the course of the year.

The second point, Nemtsov said, is legal or court reform, a crucial point for business development in the country.

Leonard Sachs is the managing director of Sachs Associates, a London-based company that helped organize the conference. He told RFE/RL that, to many Western investors, Russia continues to be an "oil prices story."

"I think the interest in Russia is completely non-correlated to other emerging markets. So the fact that Argentina has blown up has actually no impact on Russia. I think Russia is a very unique economy. I think people understand that it is not in any way a typical emerging market, and it is still in the perception of many investors very much a story linked to oil prices," Sachs said.

Other participants in the conference noted that Russian land reform and improvements to the bankruptcy law are of interest to Western investors. There is a new proposal for a bankruptcy law that does not provide 100 percent transparency but which investors believe is better than the existing one.