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Russia: A Giant Steps Up
Just months before Russia’s March 2004 presidential election, the Head of Russia’s Economic and Trade Mission to France, Mr. Ivan Prostakov, talks about the reforms enacted over the past three years to open up the Russian economy and ensure its integration worldwide.
The Diplomatic Letter: The Russian economy has recovered from the 1998 financial crisis, posting exceptional growth over the past three years. As President Vladimir Putin enters the last year of his term, could you describe the headway made in his campaign to open up the country and its economy? In view of these strides, is Russia on the road to even stronger economic development?
Mr. Ivan Prostakov: The Russian economy actually turned around four years ago, not three. Over this period, which corresponds more or less to President Putin’s term in office, virtually every economic indicator has been on the rise. GDP grew 4.3% last year, while the inflation rate fell to 15% (after climbing above 80% in 1998). Over the past three years, real per capita income has grown between 8 and 12% annually. Russian imports grew nearly 6% in 2002, while Russian imports rose 10%. These results are due to a variety of factors. Firstly, market mechanisms simply work this way: the 1998 crisis was logically followed by an economic recovery. Secondly, this boom was reinforced by a situation favorable to Russian trade, especially on the oil market. And finally, Vladimir Putin’s election as the President of Russia was a key factor in guaranteeing the political stability necessary to carry out economic reforms at the institutional level. Over the past two or three years, Russia has passed several new legislative codes: Tax Code, Property Code, Labor Code, and Customs Code. A bankruptcy law was enacted, and reforms were made to the banking system and public monopolies. An administrative reform is also in the works. This is a colossal task, but it is also an important sign that should spur economic actors to gear up their activities on the Russian market and further bolster Russia’s recovery. This tremendous work is the wellspring of our country’s long-term economic growth. As recently as May 16th, as he delivered his annual address to the Russian Parliament, President Vladimir Putin spoke of the need to double GDP by the year 2010. This will be no easy task, but since it was laid out by our President, we can be sure that Russia is well positioned to meet its goal. Be that as it may, figures for the first quarter of 2003 confirm a 7% growth rate, which should remain above 6% for the next quarter.
T.D.L.: Russia’s economic growth has been largely sparked by revenues from the export of raw materials, which depend on the ups and downs of the international market. What can Russia do to start moving toward a development model that ensures it even greater stability? Russia’s big exporting groups account for the better part of GDP. What is the government doing to create a more diverse economic fabric, and to foster the creation of small- and medium-sized businesses (SMEs), a goal dear to President Vladimir Putin?
Mr.I.P.: Our economic policy must be based, within the realms of possibility, on the principle of reducing the state’s role in the economy and thus allowing businesses greater freedom to maneuver. The reforms I referred to earlier are far from complete. They cannot be carried out within a matter of months, or even within a few years. Last year the income tax on natural persons was cut 13%, while the corporate tax was slashed 24%. VAT will be reduced from 20 to 18% starting next year, and the sales tax will be abolished. We have set up a Customs Code, but customs procedures are still changing as they are gradually simplified. This will greatly benefit SMEs. The simplified tax system in effect since 1 January 2003 is another good step forward. It simplifies procedures for paying taxes and, in certain cases, reduces the amount of tax due. Immediately after it came into force, 900,000 sole proprietorship corporations (out of the 4.5 million registered) and 500,000 small businesses (out of 850,000) opted to use this new procedure on a totally voluntary basis. The old system is still in effect, which leaves companies free to chose between the two. As for the big Russian groups that started out as suppliers of raw materials, they have subsequently diversified their activities. Russia’s ten leading groups now include not only oil companies and metallurgists, but also telecommunications groups, as just one example. For many of these companies, the goal of ensuring their own development is closely linked to the goal of protecting the nation’s economic interests. It can thus be said that Russia is now ready to actively defend the Russian market as well as its exporters.
T.D.L.: Russian authorities’ determined efforts to enact reforms were recently rewarded when the Russian economy was classified as a “market economy.” Are the reforms aimed at building a market economy bearing fruit? The pace of these reforms appeared to slacken in 2002. How do you account for the problems the government has run up against as it attempts to restructure the Russian energy sector (most notably with Gazprom), reform the country’s judicial, legal and economic frameworks, and enforce laws designed to lighten up the Russian bureaucracy?
Mr.I.P.: Russia now has all the features and institutions characteristic of a classic market economy: private commercial banks, insurance companies, a stock market, exchange control, fairly unrestricted foreign trade, companies traded on the NYSE, and many other elements that were imaginable just 15 years ago. The strides it took other countries several decades to make, we have achieved in just 10 to 15 years. This explains why, as we tackle problems that will take a relatively long time to resolve, we get the feeling that the reforms have come to a standstill. This is true of reforms involving natural resource monopolies, as well as administrative reforms. It should be noted that the French government has the same concerns, and has also run into considerable difficulties. The two countries have other shared problems that have proved to be quite sensitive, such as easing restrictions in the energy sector and creating a better balanced and less cumbersome civil service and administration. These problems can’t be solved merely by reconsidering their economic and technical parameters. There are also important political and social factors that come into play, as well as corporate interests. Privatizing natural resource monopolies and easing restrictions on the corresponding markets are both inevitable, as is the “debureacratization” process, but we must move forward with great caution. We would do better to take our time, in order to prevent serious economic and social upheaval.
I think that the French, in particular, are keenly aware of this. Moreover, we too need to reform our country’s pension system.
T.D.L.: Russia’s slowed economic growth is also reflected in persistent inflationary trends in 2003. What can Russian authorities do to combat inflation? Have the new financial instruments created in the fall of 2002 begun to produce results? Is it fair to say, as claimed by the IMF representative in Moscow, that the dwindling budget surplus is tied to Russia’s weak fiscal policy?
Mr.I.P.: The inflation rate has been steadily falling in Russia since 1988. It stood at 18% in 2001, at 15% in 2002, and forecasters expect it to drop to 12 or 13% in 2003. It is true that this rate is still relatively high. And as strange as it may sound, the favorable situation on the oil market actually presents a danger for Russia. The rise in oil prices means more than a mere increase in budgetary revenue and economic recovery. It also introduces a dangerous inflation factor. We have various ways of countering these inflationary trends, such as making use of the rather restrictive policies of the RF Central Bank and significantly strengthening the ruble's exchange rate against the dollar. The decline in the budget surplus is no real cause for concern, as a surplus on this order is uncustomary, and should be seen as a highly exceptional economic tool. For the government, having such a surplus is neither an end goal nor a criteria for assessing its profitability. And yet we need this surplus. It serves, above all else, as a reserve for servicing our foreign debt. From that angle, 2003 promised to be a difficult year. We can, nonetheless, now confirm that Russia will meet all its international commitments and that the high price of oil is enabling us to further increase our reserves. As I already mentioned above, Russian companies will carry a lighter tax burden in 2003. Taxes will be cut even further in 2004, confirming that the stability of our fiscal policy has nothing whatsoever to do with the budget surplus.
T.D.L.: Russia is more open to international trade than any other country-continent. Could you identify the Russian regions in the best position to step up their trade with the rest of the world? What must be done before Russia can join the WTO, which would put an end to the restrictive measures that continue to cripple Russian exports? How will your country, in turn, go about enacting legislation that protects intellectual property?
Mr.I.P.: Identifying the geographic regions that are the best equipped to trade with the outside world is not easy. While both Siberia and the Far East have a wealth of natural resources which they export on the global market, large firms, high-tech industries and services providers are rapidly expanding all over Russia. In recent years we have seen a boom in logistics and transportation, and in storage industries and the various formalities necessary to put goods at the disposal of clients. This shows that virtually the entire Russian territory is now open to global trade. There are a good deal of foreign firms working in this sector, including many French companies. They are operating on European soil all the way to the Urals, and have expanded their activities as far as the Pacific Ocean as well. This “expansion” argues in favor of Russian accession to the WTO. Over 80% of the bargaining positions are already being addressed in the ongoing talks. But some of the most complicated issues remain to be negotiated, such as energy, agriculture, the aeronautics industry, and the service sector, with the banking sector at the head of the line. All these sectors are of great strategic importance to our country. We are determined to create conditions that will allow our businesses to maintain their positions after the markets have been completely opened up. When we recall that even WTO member countries disagree on some of the areas I just mentioned, the Russian position is easier to understand. The most important thing is that the negotiations keep moving forward and that they end in a clear consensus. Russia wants to join the WTO, which needs a partner like our country. The problem of how to protect intellectual property is also on the list of points to be negotiated. Admittedly, we still have problems in this area that must resolved before Russia joins the WTO. To give you a better idea of the great importance we attach to this problem, let me point out that a government commission has been set up to ensure the protection of intellectual property and lead efforts against counterfeit products. This commission is headed by our Prime Minister, Mr. Mikhail Kassianov. In 2003 alone Russia passed three new federal laws designed to protect trademarks, patents and software products, to ensure that our legislative framework does indeed protect intellectual property.
T.D.L.: Under what conditions could Russia eventually join a “common economic and social area” with the European Union, a key geopolitical step in order to ensure Russia’s economic growth? The Europe-Russia Summit held on 30 October 2002 was another sign that this energetic partnership is growing steadily stronger. Is this part of a long-term cooperation strategy? Has there been any headway toward establishing closer ties in the energy (electricity and gas) and aerospace sectors, and in rekindling the Tacis programs? In view of the vast potential for joint investments and exchanges between Russian and foreign SMEs, what can be done to promote broader cooperation at this level? What is the thinking behind the recent increase in the share of euros in Russia’s currency reserves? Will this shift toward the European currency have an impact on Russian foreign trade?
Mr.I.P.: We conduct one-third of our foreign trade with the European Union, which is one of Russia’s most important partners. These are not only exchanges of goods and services. There is also the Tacis program, which is a form of “intellectual integration” that is taking on greater and greater importance as the globalization process moves forward. A good illustration of this is the program to align certification and industrial standards, in which French experts are playing a key role. The Russia-EU energy dialogue goes beyond supplying European countries with Russian gas. It also uses European technology to minimize energy losses, and looks for joint solutions to ensure that nuclear plants are better protected. There are also plans for melding our two energy systems sometime in the future. Russia and the EU have built a strong technology partnership in the aeronautics and space industries, with experts and engineers from the two countries exchanging their know-how, experiences and research results. The most recent and also the most important event in this sector is the latest decision by the European Space Agency Ministerial Council regarding the launching of the program to use Soyuz launch vehicles at the Kourou space center. I would like to underscore the fact that France has played a leading role in this matter, working in the spirit of the call General de Gaulle launched from “from the Atlantic to the Urals.” France has remained true to that call, by continuing to be Russia’s strategic partner as it pushes forward with the European integration process. It is too early to say exactly what form this integration will take, or outline its institutional framework. The idea of creating a unified Russian-European economic area seems just as remarkable today, as did the idea of creating the European Communities after World War Two. It will require building a one-of-a-kind partnership. Russia and Europe are still united by their geopolitical and economic situations. The most important thing right now is that both partners fully expect to eventually come to such an agreement.
T.D.L.: Bolstered by the excellent climate in Franco-Russian political relations, bilateral trade ties were further strengthened in November 2002 when the two countries voiced a shared desire to establish a strategic partnership in a number of key areas. Could you describe the main agreements that are being drawn up to this end, focusing on those that target the high-tech sector, research and development, the aeronautic and space industries, health care, and the food industry? French investors continue to show great interest in Russia. Could new industrial agreements be pushed through in other sectors, putting the accent on decentralized cooperation and promoting more exchanges at the regional level?
Mr.I.P.: Trade between France and Russian is evolving, with statistics showing it is steadily increasing. In 2002, our volume of trade hit 7.6 billion euros, a 3% increase. But the nature of our economic ties has changed substantially in recent years. In addition to import-export operations, we are seeing more joint investment projects and stepped up technological cooperation in strategic sectors like aerospace and energy. The most recent Franco-Russian agreements include an investment project by the Renault group, which plans to assemble a new Renault model in Russia starting in 2005. There is also a project to build a Franco-Russian engine for the Russian Regional Jet, in partnership with France’s Snecma group. Michelin will start up its first factory in Russia in July 2003. Auchan has also opened up three superstores in our country over the past nine months. A good many French companies are already working in various Russian regions, or are going to start doing so in the near future. Pechiney has plans in Siberia. Danone is setting up shop in the Volga region, while Bonduelle is moving into central Russia. There is a great deal of opportunity for stepping up cooperation at the regional level. My own experience has taught me that not only do Russian regions show greater interest in France, but that French regions have more interest in our country as well. This is long and painstaking work. Finding a good partner requires taking steps that are rarely easy. This is why the number of conferences, seminars and delegations is steadily increasing, which means we can expect more visible results. Another noteworthy event will take place in Moscow next October: “France Tech in Russia 2003.” As the name of the event indicates, this exhibition will focus on Franco-Russian cooperation in high-tech fields. It will be an opportunity to assess our partnership and launch it into a brand-new phase. This event will bring together all the different economic sectors, all across the board, from the European Union down to the regional areas.
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