Washington, 12 June 1998 (RFE/RL) -- A senior World Bank official says the continuing decline in the Russian stock market should come as no surprise to anyone.
Ira Lieberman, Senior Manager in the Bank's Private Sector Development Department, says the Russian market became "very speculative" and overheated two years ago because people saw the country long-range as an inevitable market to be in and the shares -- especially of oil and gas enterprises -- were so cheap.
Now, however, he said in an interview with RFE/RL, "given the problems in Asia and Russia's intrinsic economic problems, we shouldn't be surprised that the bubble has burst because the market was far too heated to begin with."
Lieberman is the co-author of a study on privatization and emerging equity markets that ironically was released this week by the bank and the British international investment banking group, Flemings.
It notes that the Czech Republic and Russia both started off emphasizing the rapid implementation of mass privatization, but that Russia, lacking the needed financial infrastructure and regulatory framework, lagged in securities market development.
It says Moscow was unable to implement basic rules on trading, so ad hoc securities markets emerged in response to the need for share trading venues in an inefficient market environment.
The result is that markets are underdeveloped and weakly regulated with little or no protection for shareholder rights.
The study notes that of 400 tradable stocks, Russian securities markets are dominated by the trading of only about 30 large, relatively liquid issues. With little or no activity in most of the other issues, stock quotations and prices "often do not reflect the prices at which transactions would take place."
Lieberman says the answer for Russia is clear -- it must return to the fundamentals. The tax system must be reformed to be more fair and universal, basic structural reforms across the economy must be implemented and the privatization process, which he says "went astray," must be fixed.
Russia is now dominated by very large financial-industrial groups that Lieberman says resemble the chaebels of Korea -- closed, conglomerations with hidden ties to each other and government officials. These chaebel-like groups in Russia, he says, have put the country in "deep trouble."
Lieberman says the frustrating thing is that if Russia would knuckle down to the reforms it has long known it must implement, it is a country with enormous potential. Given its oil, gas, mineral, forest and human capital resources, he says, it only awaits a generation of leaders who understand how markets work.
The study says privatization worldwide has grown dramatically over the past ten years. Revenues in 1988 which were just over $2 billion, exploded to over $25 billion in 1996. And that huge jump, it says, vastly understates the picture because the privatization of billions of dollars in assets in Central and Eastern Europe and Central Asia in 1997 are not yet included in the data.
For the former communist region, the report says that privatization revenues from 1990 to 1996 totaled around $30.5 billion, about 20 percent of the global total.
The study says that equity market development and privatization are inextricably linked and mutually reinforcing, and that both require transparency, political support, a clear legal framework, integration with overall macroeconomic and structural reforms, and a level playing field to attract foreign investment.
Lieberman says one notable success in the countries of the former Soviet Union is Kyrgyzstan, which he says has "fundamentally reformed" itself as deeply as any other country in the entire region.
"Unfortunately, it's sort of tucked away far from foreign investors and it doesn't have any natural resource base," says Lieberman. In the long run, however, he says that may be to Kyrgyzstan's advantage because Biskek will have to use its human capital to best advantage.