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Russia: UN Panel Says Urgent Reforms Needed

Prague, 7 July 1998 (RFE/RL) -- The U.N. Economic Commission for Europe says that if Russia is to return to financial stability, it must move ahead with a full program of institutional reform, giving top priority to a reorganized fiscal system.

The recommendation comes in a survey of the transition economies issued by the ECE's headquarters in Geneva. The survey also says that together with institutional reform, Moscow must make a firm committment to pursue sound and predictable economic policies.

The ECE says that what is most needed to restore calm and stability to the Russian financial markets is for such a program to be seen to be put in place, and for the authorities to be seen to be carrying it out.

The survey notes the apparent impact on Russia of the Asian crisis, but it says that fundamental internal problems seem to be the main cause of the country's present financial turmoil. At the core of the problem, says the U.N. agency, is the chronic fiscal imbalance and the manner in which it is being financed.

Russia's public debt is already four to five times larger than the annual budget revenue of the federal budget. In turn, the level of Russia's gross foreign debt is some 1.5 times higher than the value of total annual export earnings. The strain on the federal budget from servicing this debt is already heavy, and the real danger is that if public debt continues to grow at the present rate, it may soon snowball out of the government's control.

The ECE says a second major structural weakness is that, partly because of the persistent flight of capital abroad, domestic funds to finance the fiscal deficit are limited. Thus Russian authorities have been forced increasingly to seek foreign funds to finance the deficit, by direct borrowing and by selling treasury bills to foreigners.

This has resulted in an increase in the exposure of Russia to volatile short-term foreign capital. The ECE says the size of these inflows has already reached alarming proportions in terms of its potential to disrupt domestic financial markets. Consequently a sudden capital outflow carries potential threats to both fiscal policy and monetary stability.

A key contributor to the present crisis is Russia's poor tax regime. Complicated tax laws, coupled with ease of evasion, and uncoordinated action by the Duma, have led to chronically low tax revenues. The challenge now facing Russia, according to the ECE, is to design and implement full fiscal reform to restore order in public finances.

ECE economic affairs officer Roumen Dobrinski puts it this way:

"So far Russia has made very modest progress towards building the institutions and creating the legislative and institutional environment which is necessary for the proper running of a market economy. There is a serious discrepancy between that and progress in macro-economic stability, which Russia has achieved, and nobody disputes that. In order for the Russian economy to really get a kick-start towards more stable development, they have to make much more progress towards setting the right environment for a market economy."

The ECE survey notes that the country's rule of law is still not certain, and is sometimes crowded out by the rules and practices dictated by the interests of the new financial oligarchy -- often in conjunction with organized crime and a bureaucracy which is often highly inefficient. It says these institutional deficiencies underline the weakness of the state in its efforts to promote economic recovery.