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Russia: No Longer Building A House In An Economic Hurricane

New York, 9 October 1996 (RFE/RL) -- Russia is not getting the credit it deserves for the progress it has made in economic stabilization and reform, says a senior U.S. Treasury department official.

Lawrence Summers, deputy secretary of the treasury, says that people on both sides of the Atlantic see Russia's situation only in crisis terms.

"According to this view," says Summers, "while temporarily stabilized, Russia remains a dangerous place to do business," a country which is "at best a high risk" and "at worst, an explosive powder keg where fortunes are lost more easily than made."

In this view, says Summers, the "damage done by communism was so profound that any timeframe for Russia's convergence with the West should be measured in decades rather than years."

But that simply is not an accurate picture, says Summers. The lesson of reform the last few years is that Russia is like any other country which "responds to the same incentives as other economic actors" and in which markets work "as surely as they do anywhere else."

Summers made the comments to a private dinner of Russian and American bankers and business people on Ellis Island in New York harbor Monday night. The text of his remarks was released late Tuesday. It is the most comprehensive review of Russia's economic reform performance by a senior U.S. treasury official in some time.

The deputy treasury secretary told the dinner sponsored by the U.S.-Russia Business Council that "Russia is no longer trying to build a house in a hurricane, which is what reform in a high inflationary environment means."

The country has cut inflation to less than one percent per month; recorded a budget deficit last year smaller as a share of gross domestic product (GDP) than many west European countries, including Spain, Italy, Sweden and Austria; privatized nearly 70 percent of its production; and seen wages in dollar terms increase five-fold in the last four years, he says.

Now, Russia must concentrate on returning growth to its economy to help people enjoy rising living standards, firmly establish political stability and generate the resources necessary to address the country's "vast social needs."

Summers says Russians have an enviable record of saving, putting an estimated 20 to 22 percent of GDP aside. However, he says, the institutions for channeling those savings into productive investment have not yet been fully developed.

"There is no lack of creativity in Russia," said Summers. "Russians have shown they can introduce the most complex financial instruments. The problem is the lack of basic infrastructure, protection of investor rights, the development of attractive investment instruments and use of accepted accounting standards which we so take for granted."

He pointed to the lack of central registries for shares of companies as a significant impediment to productive investment in Russia.

"Until investors can rely on the basic underpinnings of a capital market -- registries and depositories, recognition and enforceability of basic ownership rights,...and a clearance and settlement system that functions promptly and accurately -- Russia will not be able to mobilize the large amounts of capital it needs to grow its economy."

Summers said the Russian government has a "critical role" to play in bringing to life the rule of law, "without tangling private enterprise in a web of regulation."

He said legal and judicial reform is needed to assure that business contracts are kept and that property rights are recognized and protected.

As well, the official said, Russia must reform its tax structure to "break the vicious cycle in which inadequate enforcement leads to shortfall in revenues which drives an increase in rates and a further fall-off in enforcement."

Instead, said Summers, Moscow needs to set lower rates, resist constant adjustment and then enforce the tax laws equitably, not just on foreigners.

The deputy treasury secretary says the ultimate success of Russia's economic reforms will, of course, "depend on the energy of its people and the quality of its government's decisions."

The international community, through the International Monetary Fund (IMF), the World Bank and other organizations, continue to have a major role, he says, and trade is still better than aid.

Russia is in a new stage of its progress, says Summers, "a stage in which growth, rather than stabilization, is emerging as the central priority."