Mr. Chairman,
Excellencies, Distinguished Delegates, Ladies
and Gentlemen,
It is a privilege and
a pleasure to address you on the occasion
of the Russian Economic and Financial Forum
in Geneva. This event is an opportunity
to look at the developments in the Russian
economy, analyse what went wrong in the
inter-session period, draw lessons and promote
further progress.
As economic analysis is
one of the areas of competence of the Economic
Commission for Europe, I would like to share
with you some of our findings that could
be of relevance for the discussion at this
Conference. My observations are largely
based on the UNECE publication "Economic
Survey of Europe", issue 1 of 2002, and
issue 1 of 2003 which will appear mid-February.
In my overview I have raised a few issues
which - to my understanding - are of key
importance.
1. Could Russia be a
growth engine for the CIS?
This question was formulated
a year ago: The size of the Russian economy
compared to the rest of the CIS and Russia's
economic links with the rest of the CIS
- Russia being their largest trading partner
- determine the Russian role as a potential
growth engine for the CIS. This could happen
depending on the extent to which Russia
can sustain the high rates of growth of
the past few years, which were generated
by the increase of oil prices and the sharp
devaluation of the rouble after the 1997
crisis. Sustainability of growth will greatly
depend on future progress in reforms, responsible
macroeconomic policies, speed of restructuring
and modernization of the economy and on
its success in transforming into a knowledge-based
economy. The heavy reliance on oil exports
would be a mixed blessing - helping in a
short-term perspective to increase budget
revenues and preserve a positive current-account
balance - but preventing longer-term development.
In the longer run, Russian exports should
not be dominated by oil and gas but rather
by high value-added goods. The recent assessment
of country readiness towards a knowledge-based
economy conducted by the UNECE in cooperation
with Russian experts and recently published
by the Commission shows considerable progress
in many knowledge-based economy indicators
but also identifies challenges that the
Russian Federation faces in this respect.
2. What progress in
reform?
In 2001-2002 reforms in
Russia accelerated. The progress in reforms
is increasingly understood as a key factor
to medium- and long-term development. According
to the EBRD Transition Report 2002, which
measures progress in reforms, Russia on
a scale of 1-4 achieved 2.8, where 2 indicates
important progress and 3 substantial progress.
Russia is most advanced in "basic reforms"
(including liberalization and privatisation)
but still lags behind in structural reforms
like reforms of institutions, rule of law,
removing administrative barriers to business,
etc. According to the World Bank Institute,
in 2000-2001 the rule of law on a scale
of -2.5 to + 2.5 the Russian Federation
achieved approximately - 0.75. The Russian
Federation - although improved - has a poor
record in fighting corruption; according
to the Transparency International CPI (Corruption
Perception Index) 2002, on a scale from
0 to 10, where 10 indicates highly corrupt,
Russia is 7.3.
Progress in reforms, in
rule of law, including law enforcement,
in fighting corruption, in corporate governance,
etc., are important factors for the inflow
of FDI. However, the FDI in Russia remains
disappointingly low.
The Russian economy continues
to be dominated by a small number of large
companies. According to the Strategy for
the Russian Federation, EBRD, 20 large Russian
companies account for 30-35 per cent of
GDP and budget revenues and 70 per cent
of exports. Share in employment in small
businesses is low and represents only 20
per cent. In the case of sharp deterioration
of terms of trade, this might be a threat
to sustainability of growth, export performance
generating hard currency for debt repayment,
but could also be a threat to reforms if
"state capture" occurred.
It is likely that progress
in reforms could start to pay off in 2003
and accelerate growth in this and coming
years. In 2002 Russia was granted the status
of market economy by the EU and the USA.
This is more a recognition of its efforts
in reforms rather than a reward for any
major impact on the Russian economy except
in antidumping procedures.
3. Russia: Towards
CIS integration?
The Russian economy ranks
among the four most open CIS economies;
in order of openness: Republic of Moldova,
Kyrgyzstan, Azerbaïjan, Russia. But
it is much less open than the Central European
Economies or Baltic countries.
The openness among the
CIS countries is low: the current multilateral
trade agreements, like the CIS Free Trade
Area, have not so far worked. Only about
60 per cent of Russian trade with the CIS
is conducted on a free trade basis. There
is more enthusiasm for making the Euro-Asian
Economic Community work as a customs union,
which currently includes Russia, Belarus,
Kazakhstan, Kyrgyzstan and Tajikistan. In
practice it maintains a fair approximation
to a free trade regime in a wide range of
traded goods. However the integration agenda
requires further harmonization of legal
instruments and implementation of measures
in many areas. The real impetus to the deepening
of integration would be if Russia and other
members followed Kyrgyzstan in joining the
WTO. WTO membership for just a few countries
in the Community is a negative factor for
further country-grouping cooperation.
WTO membership for Russia
is a challenge: so far Russia has been more
focused on concessions in accession negotiations
(like in agricultural subsidies, in double
pricing of energy, in financial services)
than on their speed. Although this is understandable,
speed also matters. WTO accession could
boost the intra-CIS trade to the benefit
of all members and strengthen their position
towards possible protectionist measures
of other WTO members.
4. Will Russia benefit from EU enlargement?
The Russian authorities
are concerned about the impact of EU enlargement
on the Russian economy. The adoption of
acquis and the adoption of EU tariffs by
acceding countries in some areas could involve
negative impacts on Russian exports to newcomers
(like rules on diversification of energy
resources, rules on trade in enriched uranium,
restrictions on hydrocarbon transit, anti-dumping
imposed on steel, chemicals and other products,
tariffs on agricultural products, etc.).
Although estimates differ, short-term losses
are very likely. It is important that the
EU, on the basis of PCA (Partnership and
Cooperation Agreement) or perhaps updated
PCA, further develops trade provisions that
could compensate losses. Negotiations are
progressing in the framework of the CEES
(Common European Economic Space) of which
the EU-Russia Energy Partnership is most
advanced area. It is important that the
progress is accelerated and takes into consideration
the legitimate interests of all parties.
5. Does welfare of population
increase?
Some indicators prove that
there have been positive social developments
in recent years, like increase of gross
monthly wages, one-digit unemployment rate,
growing consumption of households, etc.
On the other hand real wages due to high
CPI (Consumer price index) are stagnant
and the lower unemployment rate might be
partly explained by low speed of corporate
sector restructuring and lack of incentives
to be registered as unemployed. Despite
the fact that since the 1997 crisis starting
from 2000 the social situation has considerably
improved and despite the ongoing efforts
in this field (like recent pension reform,
etc.) Russia has a poor record in indicators
of income inequality (Gini coefficient increased
to 0.50) and in percentage of population
living below the poverty level. In 1996,
50 per cent of the population lived on less
than 4.3 US$ per day in PPP (World Bank,
Making Transition Work for Everyone, Poverty
and Inequality in Europe and Central Asia,
DC 2000). Efforts to improve population
health should also increase. After 1989,
population health degradation was rapid
and deep. It included decline of life expectancy
of men, rapid increase of HIV positive,
etc.
Mr. Chairman,
At the beginning of 2003,
the economic situation in the world economy
is looking increasingly fragile. It appears
likely that global growth will be in the
range of 2-3 per cent in 2003: There are
considerable downside risks. The consensus
of forecasters is now that the recovery
has been postponed until the second half
of 2003. Yet much will depend on decision-makers
and on their policies to respond adequately
to challenges for the benefit of the people.
I hope this conference will provide some
impetus to the proper decision-making. I
wish your Conference fruitful deliberations.
Thank you for your attention.
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