[Deb Palmieri on Russia Table of Contents]
The following article was published in the Russian Commerce News, January-February 1997. The Russian Commerce News is the official publication of The Russian-American Chamber of Commerce®. |
Is 1997 a "Make-or-Break Year for Russia's Market Economy?
1997 is being touted by many as the "make-or-break" year for Russia. Negative or stagnant growth and production curves are expected to begin an upward climb and the achievement of macroeconomic stabilization is expected to metamorphize into long-term economic prosperity and growth. Investors pin high hopes on the upcoming year of the bull, especially given that Russia last year outperformed all emerging markets, posting an annualized return of 156% in dollar terms. Russia is under careful scrutiny and is expected to run fast and fly high, today, if not yesterday. Is this a realistic and healthy set of expectations?
An evaluation of major economic and political developments in 1996 produces a picture of remarkable achievements on the one hand, and major disappointments on the other. On the upside, democracy and governance based on rule and procedure triumphed, with incumbent President Yeltsin winning the presidential election and a host of federal legislators, governors and regional officials elected into office, most of them sympathetic to the central government. Annual inflation decreased from a high of 131% in '95 to a manageable 22% by year end '96. Interest rates decreased; the spread of income gaps slowed and the Russian middle class grew. The foreign trade sector posted a strong showing with trade turnover amounting to $133 billion in '96 - about a 5% increase over '95. Russia's '96 trade surplus totaled $40 billion, with exports posting at $86.5 billion, up 8.3% from '95. Foreign investment in Russia grew steadily, and reached an aggregate total of almost $12 billion by the end of '96. (It is expected to reach at least $16 billion by the end of next year.) The number of Russian companies privatized totaled approximately 3,600, although the state is estimated to hold another 3,000, many slated for sale this year. Most analysts concur that the increase in trade, consumption and savings were welcome signs of stabilization.
Notably, despite widespread negative Western press on organized crime and the high profile incident of the killing of Paul Tatum, this factor did not deter foreign inroads into the Russian economy.
The consensus that emerged among the foreign business community about the number one problem in doing business with Russia centered on tax issues. The need for a workable fair and consistent tax code; the ability of the state to collect tax revenues; the ability of the State Tax Committee to develop consistent and reasonable policies for foreign companies are all major priorities in the coming year.
The disappointments of 1996 are well known. Russia experienced a 6% decline in GDP in '96, its fifth straight year of economic deterioration. Industrial production decreased by around 5%; output by 28%; building materials 25%; machine building by 11%; petrochemicals by 11%. Even oil output, and coal and electricity production decreased (albeit only slightly 2-3%) from '95 levels. Agriculture remained extremely unproductive, with over 75% of farms at unprofitable levels.
Despite these shortfallings, when posted against overall achievements, there is no question in my mind that Russian economic recovery will continue and make strident gains this year and beyond. Besides, one should cast a skeptical eye on official statistics, which may exclude a significant amount of unreported activity or suffer from methodological inconsistencies. But I urge caution on both Russian and American sides to maintain realistic expectations of what can and can't be achieved. We need to apply that old adage "a watched pot never boils" to Russia. The country needs some breathing space and the ability to creatively craft solutions to gut-wrenching structural transformations without the under-the-gun pressure of one-year ultimatums or do-or-die scenarios often intimated by international lending institutions, government officials and others. Rather than place a heavy emphasis on achieving artificially set statistical norms for GDP, production, employment, etc. is to pose these questions: Is Russia moving in the right direction by virtue of the fact that the majority of changes fall closer along the continuum of reform, rather than that of reaction or retrograde change? Do the positive advances outweigh the negative? Do Russians recognize the problems at hand and are they searching diligently for solutions? These are the type of criteria we need to use to better assess all-around Russian performance.
Aside from the fact it's somewhat paternalistic to impose outside expectations and demands on the internal workings of Russia and thereby wield the economic carrot or stick (witness the IMF withholding loan transfers in November and December '96 because of "disappointing economic behavior"), the West should understand that Russia must develop at a natural pace without frenzied outside pressure to achieve economic miracles in impossibly short periods of time. By its very nature, the normalization process should proceed at a moderate, not a breakneck pace to achieve long-term stability. Lightening speeds to achieve growth can result in crash and burn landings.
The absolutely most important objective of the reforms is to create and maintain a stable Russia within the context of a stable international environment. This is a fundamental necessity for American national interest, aside from the economic benefits we will reap. A cooperative foreign policy, security and military relationship between Russia and the West; between Russia and its bordering neighbors and specifically between Russia and the U.S. is the building block and springboard for healthy economic bilateral and multilateral relations amongst all parties. We should not take for granted the present period of diplomatic, political and economic stability we enjoy with Russia. Our short historical memories forget past patterns of conflict and confrontation with Bolshevik Russia and Stalinist Soviet Union, not to mention business and economic sanctions over Afghanistan's invasion. The present flourishing of ties between both nations is genuinely a gift and should be greatly appreciated, as a result of hard work and outstanding efforts between the Clinton and Yeltsin administrations.
An understanding of this crucial point is why every business person should carefully watch developments as they unfold pertaining to debates surrounding the expansion of NATO. Yeltsin is strongly opposed to NATO's eastward expansion for the simple reason he doesn't want the potential of nuclear deployment on Russia's borders. He naturally then desires a formal role in the decision making framework of NATO's disposition, including its enlargement. NATO has resisted this, and herein lies the number one political problem, which Russia, by the way, defines as its major foreign policy priority this year, that has the potential to significantly impact business relations. Diplomatic history in this century between the U.S. and the Soviet Union has demonstrated that incompatible concepts of national security inevitably result in conflict. That's what the Cold War, which resulted in minimal business ties for nearly four decades, was all about. It is in the interest of the business community to voice the need for a win-win solution on this issue, and one that will accommodate Russia's fears and anxieties, while maintaining our security interests at the same time.
Meaningful measures of reform and progress in Russia should be defined by realistic expectations and the benchmark questions suggested above to avoid dashed hopes and disillusioned partnerships. They also require knowledge that sensitive political issues, like the present NATO debate, should be carefully managed to guarantee optimal economic outcomes for both sides.
Deborah Anne Palmieri
Russian Commerce News, January-February 1997
Copyright 1999 The Russian-American Chamber of Commerce®
|