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Russia: Investors Want Economic Reforms From Putin

Moscow's soaring stock market, up 35 percent in the three months since Vladimir Putin took over as acting president, shows that Russia's economy did not wait for his election last Sunday to register its approval. But RFE/RL's Moscow correspondent Sophie Lambroschini reports that foreign investors in Russia will require quick progress on reform of the legal and tax systems, before they show similar confidence.

Moscow, 30 March 2000 (RFE/RL) -- There were strong hints Wednesday (March 29) that Russia's next government -- which will not be officially installed until President-elect Vladimir Putin takes office in May -- will focus on economic matters. Deputy Prime Minister for Economic Affairs Ilya Klebanov told reporters that his duties will be widened, while another deputy premier will named to handle financial affairs and a third will oversee the oil and energy sector. There will now also be a fourth deputy premier, who will handle social affairs.

But according to Denis Rodionov, a Moscow-based analyst for Brunswick-Warburg, investors are waiting for action, rather than words, before judging the new government. Rodionov says that, in the short term, the chief question is who will be the new prime minister:

"The thing is, Putin himself is not an expert in economics, he doesn't have a solid economic background. That's why everyone understands that the government's economic policy will be put into effect primarily by the prime minister and not by the president. In this sense, it is very important for investors that the prime minister has good economic knowledge, that he is known to them by some previous actions."

Rodionov says that Deputy Prime Minister Mikhail Kasyanov -- whose name has been often been mentioned as a likely head of government -- would be the most acceptable candidate for investors. Kasyanov speaks fluent English and in recent months negotiated the rescheduling of Russia's foreign debts with the West.

In the view of international lending organizations, however, investor confidence in Russia can only be re-established if critical structural reforms -- needed since 1991 -- are carried out. The structural problems include an unreformed banking system, outdated tax laws, the continuing hemorrhage of capital abroad and the general failure to establish the rule of law. An effective bankruptcy law and protection of the rights of investors and property owners are also essential.

The European Bank for Reconstruction and Development, or EBRD -- the biggest single foreign investor in Russia's private sector -- urged structural change in a statement released today (Thursday). EBRD acting chief Charles Frank said that his institution is ready to support Russia's new authorities in building a viable economy -- provided Moscow is ready to implement reforms. Frank singled out restructuring the banking sector and ineffective state companies, as well as guaranteeing implementation of present contract law, as what he called essential economic "building blocks."

Foreign companies operating in Russia are banding together to lobby the government for such reforms. The Foreign Investment Advisory Council and U.S. and European business groups are setting up working groups to advise on tax and legal reforms. Among other things, they want the government to create an ombudsman's office that could help business cut through the Russian bureaucratic morass.

Analyst Rodionov points out that no one yet knows how determined Putin is to distance himself from Yeltsin's economic policies:

"There are two realistic paths of development. One is in the direction of more market reforms and a more active implementation of these reforms by utilizing the support of the [newly elected State] Duma. And the second path is the continuation to a certain extent of Yeltsin's policy, which can be described as moderate reforms. [Which path will be taken] depends to a large extent on Putin himself, and how independent from one group or the other he will show himself. That's something we still don't know."

Beyond new legislation and structural reforms, investors are also waiting to see whether Putin will act on his pre-electoral promise to hold Russia's oligarchs -- or business tycoons -- to the law and keep them out of politics. Rodionov says:

"There's not a single law saying that oligarchs have the right to use the state apparatus and state property in their own interests. That's why the most important thing [to watch is how current laws] are applied -- how the government will act. For example, will tenders be organized according to fair rules, or will they be distorted in one way or another?"

Other key factors for investors include the behavior of the International Monetary Fund, or IMF. An IMF decision is pending on a 640-million-dollar loan installment for Russia. On Monday (March 26), the Russian government warned that it intended to revise conditions for the loan, although it did not specify which conditions. At the same time, the IMF's director for Russia, Martin Guilman, told a Russian daily ("Vremya") that the fund was waiting for what he called "signals" that the future government would quickly implement a new economic reform program.

External factors can also affect the investment climate in Russia. Yesterday's decision by OPEC -- the Organization of Petroleum Exporting Countries -- to increase crude oil output is a crucial case in point. The OPEC decision spurred a decline in world oil prices that will surely reduce Russia's export and tax revenues from oil. It could also lower the ruble's exchange rate, thereby compromising Putin's promises to keep the currency stable.

Soaring oil prices over the past several months were a major factor in the recent improvement in Russia's economy, swelling budget coffers and foreign currency reserves, which are now higher than at any time since 1998's effective ruble devaluation.

Many observers are concerned that high spending will now lead Moscow to borrow from the Central Bank, with possible inflationary consequences. Such an outcome would not encourage more investment in Russia.