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The East: Russia and Ukraine Face Serious Economic Problems

Washington, 26 April 1999 (RFE/RL) -- The World Bank's top official dealing with Russia and the other nations in transition in Central and East Europe paints a sobering, even daunting picture of what many in the region will face over the next year or so.

Johannes Linn, the bank's Vice President for Europe and Central Asia, says the region faces a protracted crisis of economic, social, and now security problems especially in the next 12 months.

Speaking to reporters in Washington Sunday before the start of this week's annual meetings of the bank and the International Monetary Fund (IMF), Linn said Russia and Ukraine especially face serious economic difficulties:

Linn said: "We continue to expect a decline in output and uncertain political outlook due to elections that are coming up this year and next year. The social situation in these countries is fragile since incomes are continuing to decline and social support systems are continuing to weaken. Poverty is on the rise, in Russia, for example, in our estimate, almost 20 percent of the population is in extreme poverty. And we of course also see a situation where structural and social reforms are incomplete and proceeding only very slowly and with limited political support."

Linn says the impact of Russia's continuing financial crisis is being felt to various degrees around the region.

The countries in Central Europe -- Hungary, Poland and the Czech Republic -- are the good news, he says, remaining relatively stable and unaffected by the crisis because of early reforms and strong policies.

But for most former Soviet countries, the impact has been severe and will be felt for a long time to come, says Linn. The global economy won't make the real difference among these nations, he says, it depends on their own policies and their proximity to Russia:

Linn said: "If Russia could recover and recover quickly, this would have major beneficial impact on all the countries around Russia. So it's not the global perspective per se that is the overriding importance here, but it's sort of regional factors that have the impact."

Asked about lessons learned from the Asian and Russian financial crises, Linn said there were many, including the basics of strong domestic reforms. But one lesson that was part of Russia's collapse last summer was it's strong defense of currency exchange rates. A major part of the IMF's last loan drawing for Russia was eaten-up in the Central Bank's attempt to defend the exchange rate of the ruble. Linn says it's clear now this can lead to severe crises:

Linn said: "Ukraine is a good example where in fact a rather sensible management of getting away entirely from a fixed exchange rate in fact prevented the kind of melt down we see in Russia.

"The weakness of banking systems and supervision, linking this of course also with the exposure of short term debts, in appropriate foreign exchange positions -- again Russia being a good example, -- are another important lesson that we are drawing for much more work and attention has to be given."

Another significant lesson says Linn is the danger of a weak social safety net. Very weak social protection systems are unable to deal with the fallout of severe economic crisis, says Linn. Russia was particularly bad, he says:

Linn said: "We had difficulty in engaging the Russians through 1996 in an active dialogue on social reforms, and still have difficulty in Ukraine today. Earlier attention to social system reforms of social systems and then more significant action also would have helped in crisis response."

Russia has still not dealt adequately with its social safety net, says Linn and the deepening crisis only makes clearer that Russia cannot afford further postponement of reform. He says that in a recent study of the social system in Russia, the bank believes that the worst of the crisis is still ahead in another 12 months. Next winter will be the hardest time, says Linn, far worse than this year.

The bank projects that real personal incomes in Russia will fall an average of 13 percent through 1999, with the extreme poverty rate rising to over 18 percent of the population while social expenditures by the government will fall by 15 percent.

More broadly for the region, Linn says the major lesson from the crisis has been the necessity of a political consensus on reforms. He compares Bulgaria and Romania as examples:

Linn said: "Though Bulgaria has now in fact recovered from a severe financial crisis only two years ago because in fact it has pursued a consistent and comprehensive reform and stabilization process based on a reasonably clear and sustainable political consensus between the president, the government, parliament and wide segments in the population. Romania, by contrast, has had considerable difficulties that one can trace back to the lack of political consensus and difficulty of forming a clear political underpinning for reform and stabilization.

"Now we're hopeful that in looking forward, Romania can find a more consensus-oriented reform process and indeed Romania is one of the pilot countries for the comprehensive development framework where we will focus very much with the leadership and under the leadership of the president, on trying to build this broader consensus, so that to me is a very important lesson."

The World Bank's Vice President for the East Asia and Pacific region, Jean-Michel Severino, told reporters that East Asia is finally seeing some financial stabilization:

Severino said: "But the recovery is extremely fragile. Exports are going very slowly and domestic demand is still very fragile. This is because of the evolution of world demand. There's not much growth in the system around the world and the fragility is compounded by the social and political uncertainty that exists in the region."