Russian Economic Perspectives—Plenary Session

Dr Igor Kostikov, Chairman of the Federal Commission for the Russian Securities Market �

'A Fair and Effective Securities Market � the Key Factor in Economic Growth'

Dr Kostikov began with a history of the securities market in Russia. He pointed out that since the first piece of legislation on 19th June 1990, which had come in the form of a government decree on equities and bonds, the Russian securities market had developed in different directions. Indeed, the last three years had been totally different for the Russian securities market due to changing regulations brought in at the end of the 1990s. The securities market was one of the main sources of financing of corporate Russia today. The problem that had become prominent after 1998 was how to regulate the market, primarily to increase market efficiency. The model proposed by advisors to the government, however, had been inefficient. It had been unable to perform basic macroeconomic functions, had lacked large numbers of private investors, had placed the securities market in a subordinate role regarding privatisation and the government debt market, had overrated quotations, encouraged high market volatility, and had failed to provide mechanisms to protect shareholders� rights in the capital market. There had simply been no transparency in the system.

Consequently, the government had engaged in sweeping corporate reforms between 2000 and 2002. In 2000 the government had introduced a corporate governance code, which had been delayed by about six months to allow for efforts to convince the Russian business community to back the proposal. The first results of this new code would be out this year. Reforms had also been introduced between 2000 and 2002 on collective investments, with a view to stabilising the market. A new law had been brought in this year by presidential decree to drive through real changes in this industry. Within the same time frame, there had been reform of securities market regulation to create better conditions for transparency and more efficient management. Since 2000 the government had also been engaged in tax reform (Dr Kostikov noted that there was no capital gains tax in Russia), and reform of the enforcement system in capital markets. All the corporate reforms had focused on improving three basic conditions: shareholders� rights, information disclosure, and corporate governance. To the extent that one could measure the success of these reforms, the growth of Grade A lists of businesses was encouraging; almost fifty percent of trade on investment involved companies that complied with corporate governance standards. The aim of collective investment reform was to establish a legal framework for the industry, to improve its infrastructure (and avoid monopolies), to reduce operational risks, and to introduce a new level of responsibility and liability. Unfortunately, not everyone was yet convinced that the market was for investors. Market capitalisation had been expanding in Russia and the market was demonstrating increasing liquidity. In the 1990s the figures on trading had been bogus; real data did not exist and were taking a long time to collect, but hopefully would be available by the end of this year. The bond market was being criticised for being a bubble that would burst, but this was not necessarily the case. It could indeed be another factor for growth. The bond market had been used as an alternative to banking, as the banking system had not been worked very effectively. Russia had still to adopt an insider trading law, amend the criminal code and the securities market law on depositary activity, and increase the role of the stock exchange as a quasi-regulator. All these were reforms planned for this year. Dr Kostikov concluded by arguing that the liberalisation of the Russian securities market required a great deal of discipline as well as understanding that the investors played a key role and others had to serve their needs.

Professor Vladimir Mau (Rector of the Academy of the National Economy of the Russian Federation)

'Russian Economic Reform: Results and Prospects'

Professor Mau began by arguing that it was important to analyse the results of the last twelve to fifteen years of radical transformation of the Russian economy and ask what were the challenges for further economic and social development. To gain a better understanding of this transformation, one had to see Russia as having faced four crises and four transition processes, each of which were well known, but their combination in the Russian case had been unique. Firstly, Russia faced the challenge of all post-industrial societies (which the West had faced in the 1970s) of low or negative growth rates. This situation had hit the Soviet Union after the collapse of oil prices at the end of the 1980s. Secondly, there was the budgetary or fiscal crisis, which had taken seven to eight years to overcome. This had been a standard crisis in the sense that it had been solved by a standard and orthodox stabilisation programme. Thirdly there were the problems of transition. These were not unique, but in Russia there had been almost no state involvement in the transition. Three of these crises were now over, but the main problem that would determine Russia�s economic future was the structural reform of post-industrial society.

The social and economic challenges facing Russia were connected to two issues: the post-industrial challenge of �catching up�; and the logic of forced revolutionary reconstruction, first illuminated by Russian economists in the 1920s. It would now be very easy in Russia to increase the growth rate, but also very dangerous. The problem was the lack of credit history in contemporary Russia, and this of course could not be introduced by law. Market institutions were created not by law but by credit history. Professor Mau pointed out that development in a post-industrial society required a completely different economic policy to that of a mature industrial society, as the time perspective for planning in a post-industrial society was greatly reduced, where it was hard to predict conditions even five years into the future. It may be necessary to have a higher budget to GDP ratio in order to reallocate resources and make room for stability, and invest in human resources (such as medicine). Structural rather than fiscal reform should be emphasised, and based on research and development, production, and human demand for health and education (rather than being based on state demand). Professor Mau ended his talk by highlighting the necessity of political, military and judicial reforms to economic development.

Academician Nikolai Shmelev (Director of the Institute of Europe, Moscow)

'Major Unanswered Questions in Russian Modern Economic Discussion'

Academician Shmelev argued that he could not agree with assertions commonly heard in the West today that Russia did not know what it wanted or what it should do. In fact, there was a great deal of consensus in Russia, and the most influential political parties had a great deal in common here. There was general agreement within Russia that the country needed to build a socially considerate market economy; Russians wanted a market economy but not a market society. Academician Shmelev voiced concern about the second wave of privatisation, involving electricity, railways, communications and leading enterprises. The markets varied on the stock exchange and their estimates were now between thirty and sixty percent lower than their real value. This implied that society would gain as little as it had from the first round of privatisation. Academician Shmelev urged that the second round of privatisation be postponed for another two to three decades. He also questioned whether Russia should aspire to adopt the European price system in its domestic economy (to adopt an absolute price levy instead of a price structure), particularly in light of the different trade advantages of various countries. Given the weakness of the Russian banking system, he pointed out that it was also reasonable to ask whether Russia could for the foreseeable future have stability without an effective credit system. In Russia people preferred to hide money under their beds or abroad rather than invest it in the stock market. This would be a very difficult problem to solve if there were no successful change in the laws on personal savings and banks. Furthermore, Russia had lost two thirds of its science and technology researchers over the past ten years, because they had either emigrated, become unemployed, or had gone into business. If this trend continued Russia could lose its standing as a high-tech country in fifteen to twenty years. As for the agricultural sector, there was no intelligible government policy, and no plans to restructure the increasingly abandoned Russian countryside. The problem of enormous discrepancies between the salaries within Russia of ordinary workers compared with their European counterparts could be eased rather quickly. A related question was whether modern Russia would be able to afford the reorganisation of the whole structure of society. It was difficult to see how the real, commercial price of medical care, education and house rents could be afforded by most people in Russia. Academician Shmelev also argued that despite the high profile currently being given to small and medium sized businesses in Russia, after twelve years of transition this sector was essentially faring worse than it had at the beginning of the 1990s. Finally, Shmelev said that full World Trade Organisation membership was an indisputable necessity for Russia, but unfair terms of entry should be not be forced upon the country, nor should membership distract public opinion from the other much more important problem for Russia of capital outflow.

(This point was later disputed by Professor Mau, who stated that Russia had never followed IMF recommendations or reformulated ones. Russia simply did not follow recommendations it did not like (for example in 1992 recommendation to keep the rouble). The blame for faulty policies should therefore be placed on the Russian government rather than on the IMF.)

Dr Rair Simonyan (President of Morgan Stanley, Russia)

'The Investment Climate'

Since the session was running out of time, Dr Simonyan confined his talk to a few concise comments. He emphasised that the significance of the investment climate for the economy was that it determined the ability of people to make money. The question had to be resolved of whether it was possible in Russia to make money in a sustainable and predictable way, or whether it would remain a gamble. The answer to this question would depend on the risk environment, the rewards (which were now obvious as investor perceptions had changed dramatically since the sobering lessons of the crisis of 1998, which had led to cautious optimism and more pragmatic and sophisticated investor behaviour), the appetite for rationalising the system, and comparative opportunities in other countries. The main difference compared with the situation five or ten years ago was that investors now liked the environment, as they found Russia far more predictable. Putin�s presidency had provided a much needed element of stability, and investors would probably prefer this period to continue rather than for Russia to undergo further radical transformation. The rules of the game were being set in place in Russia, even if one could not yet talk about the existence of the rule of law.

In answering questions, Dr Simonyan stated that what was important about this period of time in Russia was that the rules of the game were becoming much clearer which increased predictability. The fundamentals in Russia were better and compared well with those in other emerging markets. Moreover, the behaviour of top managers, which in the 1990s had been far from rational regarding privatisation processes, had changed as they realised that they now had assets that needed protecting. Most understood that they needed to employ professional managers, and had begun to separate ownership from management. One of the most profound changes had been that corporate owners had begun to realise that it was in their self-interest to become good corporate citizens and act in a civilised way, and that they could make much more money this way than by channeling money abroad or not reporting it. The market in Russia was thus becoming more rational.