Russian Economic and Financial Forum Second session
(Geneva, 27-28 January 2003)
Statement by Mrs. Brigita Schmögnerová,
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.
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.