Reforming Russia: Problems and Prospects

Introduction

Canada and Russia have many things in common: hockey, the weather, and a plethora of untapped natural resources. And, at the moment, we both also face political and economic challenges.

The past few years have witnessed the unfolding of a remarkable struggle within Russia to achieve a Western-style market economy. The challenge has been made even more difficult by the inefficiencies left behind by the former communist system. From the establishment of co-operatives to the issuing of privatization vouchers, a lot of effort has been expended by the Russians to make the reforms work. Complicating the situation is the status of the ruble. It is undervalued but no one knows by how much.

Adding to this complexity is the human trait of resistance to change. The early enthusiasm for a market economy has begun to turn to criticism and hostility from a population weary of shortages and the pace of reform. As John Galsworthy said: "Idealism increases in direct proportion to one's distance from the problem."

And the problems faced by the Russian people are nothing short of overwhelming.

His Excellency, Ambassador Alexander M. Belonogov, was posted to Canada in April by President Yeltsin. Prior to that, he served as Deputy Foreign Minister of Russia, capping a distinguished diplomatic career spanning more than 30 years. As a former Soviet Ambassador to the United Nations and Soviet representative on the United Nations Security Council, he has had a wide range of experience in international relations. He played key roles in attempts to mediate a peace settlement before the 1991 Gulf War and to secure peace in Afghanistan.

Western nations have undertaken many initiatives to try to ease Russia's transition to capitalism. But, with growing political uncertainty in Russia and recession in the West, many governments have been forced to lessen their involvement in bringing former Soviet countries in to the capitalist fold.

Mr. Belonogov has made it quite clear that he is here in part to invite investment in his country. And, as any hockey fan can attest, the NHL has not been shy in taking advantage of Russian resources, so perhaps we should return the favour.

Today our speaker will be discussing the topic of Russian reform, its challenges and its opportunities.

Please join me in welcoming His Excellency, Ambassador Alexander Belonogov.

Alexander Belonogov

It is a singular honour for me to be invited to share my thoughts and views about the reforming Russia before an audience as distinguished as The Empire Club, well known as a reputable venue for thoughtful and constructive dialogue.

I am particularly pleased to have an opportunity to address my remarks to prominent people of the Canadian business world and to representatives of young Canadians who will eventually take upon themselves the responsibility for the future of Russian-Canadian relations.

Russia is very much in the news, even though we have no Blue Jays and more and more talented Russian hockey players choose to enjoy the hospitality of NHL clubs, instead of being sensations on Russian ice.

But it looks as if we are in the news partly because we fully share your famous love-hate attitude towards constitutional reforms. More and more they seem destined to become our dear, perpetual companions. Indeed, during the last 70-odd years, the people of my country had the dramatic pleasure of bidding farewell to at least five constitutions.

And now the Russian government is in a fierce fight with the Russian Parliament (or vice-versa) as to when to convene the Congress of People's Deputies to adopt still another constitution, and what it should provide or not provide.

Joking aside, your interest, ladies and gentlemen, in Russia and its future is more than well founded. It is not just an issue of vital importance for citizens of Russia, it is an international, I dare say, global issue, given the dimension of its possible consequences. Russia is, and will remain, a great power. The big question is what sort of power and what policies will it pursue?

Now we are head over heels in reforms, all sorts of them--political, structural, administrative, social, judicial, but foremost, economic reforms--a subject in Russia as vast, complex, multifaceted and fascinating as the country itself. Having resolutely and simultaneously started a process of numerous radical transformations, Russia is on the move.

The results of the first 10 months of this painful, and sometimes controversial movement, provide fodder for various--sometimes totally contradictory--interpretations. Pessimists and optimists alike find themselves on shifting ground, confounded by unfolding events.

Needless to say, serious problems have emerged. This year economic output in Russia has fallen by a further 15 per cent. Quite a number of factories are on the verge of closing. Living standards of millions have dangerously deteriorated. Add to this, sky-rocketing inflation, a soaring budget deficit, the rapidly deteriorating state of our national currency, the growing burden of foreign debt, a still-reluctant and, in some instances, hostile attitude of many industrial managers towards the government's implementation of economic reform, and you have a fairly accurate snapshot of the negative side of our transition to a market economy.

Many people in my country are now wondering whether the invisible hand of the market is not really an iron fist.

And let me remind you that this happens against the background of institutional debris of the demolished Soviet Union, the collapse of strong central authority, spreading corruption, rapid growth of the crime rate, drug trafficking, black-market arms trade and the activity of Mafiosi structures.

Small wonder that such a state of affairs provides more than sufficient ground for accusations and counter-accusations, sometimes unsavory political attacks and mounting inter-party rivalry within Parliament and without.

However, to the perceptive eye, these clouds reveal a silver lining. For all the economic hardship, Russia has succeeded so far in avoiding serious social upheaval and disturbance. So far the Russian people have accepted breakneck change with remarkable patience and understanding.

More than just a sign of hope is also perceptible in the nature of the evolution of our internal political system. The facts of the day in Russia are--an absence of political prisoners, political pluralism, democratic elections, absence of censorship, freedom to travel abroad and to emigrate, depolitization of state machinery, including the armed forces, and institutionalization of the separation of powers among the legislative, executive and judiciary branches, a renaissance of religion, and many other phenomena, either unknown or violated in times past.

These changes are of profound importance, as are those in the state structure of the Russian Federation. This year, all but two of Russia's 80-odd territorial subdivisions have signed a federal treaty dividing powers between them and the centre. This significantly increases the chances that one of the great concerns about the Russian Federation--that it may break up--can be contained.

In his latest speech to the Russian Parliament, President Boris Yeltsin underlined the necessity of broadening the political and social base of our reforms by the consolidation of various political movements. Having suggested that the present government be more open to ideas other than its own, he clearly expressed his intent to intensify constructive dialogue with various political forces, including the opposition.

Some positive developments can also be identified in the area of co-operation among former Soviet republics--members of the Commonwealth of Independent States (CIS). Despite the host of unsettled questions, persistent suspicions, and rivalries, a recent meeting of the leaders of CIS states in the capital of Kyrgizia Bishkek has underlined the growing consensus on numerous issues among Russia, Belarus, Kazakhstan, Uzbekistan and Kyrgyzstan.

It appears those five states are moving progressively towards the creation of a new integration nucleus with more clearly defined structures and mutual commitments.

I would like to believe that this positive trend heralds a better situation within the Commonwealth, actually making it a two-speed community. The core of this emerging two-tier interstate structure would be composed of a solid inner circle of member-states closely co-ordinating their policies. According to their priorities and perceptions, other member-states would be able to adjust the speed and degree of interaction with this circle on a strictly voluntary basis.

This flexible scheme of co-operation provides enough room to manoeuvre and accommodate various national aspirations so that present-day laggards are not doomed to be laggards forever.

In the economic sphere, one shouldn't fail to spot those visible and reassuring signs of progress that bode well for the proclaimed reforms. They can be found in the steadily increasing privatization of shops, services and small enterprises; the growth of market activity on every roadside; the growing self-confidence and experience of the entrepreneurial class; the multiplication of political, commercial and social links of Russia with the rest of the world, and the increasing activity of foreign companies in Russia.

The government, even with all that weighs it down, is still maintaining the momentum of its program of economic

reform and pursuing necessary change. As you probably know, President Yeltsin recently admitted that the government had made some mistakes in reform policy which had brought unnecessary hardship to people and industries.

However, he stressed that he envisaged corrective measures which would not betray reform, which is expected to stay on track, if at a somewhat slower pace.

I should stress one important thing in this context--apart from those circles in Russia who reject, outright, the very idea of private property, the clashes between the present government and the main opposition factions are not about whether or not to have a market economy, but how to achieve this aim by what means and at what price.

All these factors and, of course, the enormous natural resources of the country, its solid scientific and cultural base and its skilled workforce, provide really good ground for optimism about the future of Russia's economic performance. However, the difficulties that still lie ahead are daunting.

The government intends to continue its policy of price liberalization, including the gradual raising of energy prices to world levels. Unlike the first rounds of price hikes, this measure will hit enterprises much harder and, consequently, will substantially increase their pressure on the government for easing of fiscal and monetary policies.

Serious problems could also be posed by unemployment. Last year it increased by only one per cent. But the next stages of the reform process will have to address the problems of the labour force and industrial restructuring. In its turn, that will inevitably entail idle plants and increased unemployment with a corresponding rise in public discontent. These factors assign high priority to the task of creating an adequate and reliable safety net.

Another extremely important task is to correct structural deficiencies of the Russian economy. The government understands it must reform the economy in such a way so that the gap between demand and supply is bridged, not just by abrupt contraction of nominal purchasing power, but mainly by a vigorous expansion of output.

And here there is an extremely wide field of opportunity for foreign investors and foreign technologies.

We also need to rapidly acquire the proper legal framework to make our economy work much better. Essentially, this means assuring the sanctity of contracts--a clear, stable legal and regulatory regime; open government decision-making regarding business; and predictable and civilized rules on ownership of land, fixed assets and resources.

In addition, there is a clear necessity to institute and enforce a tax structure that permits producers, both domestic and foreign, to operate with the least possible burden so that commercial benefits for both sides are not unduly impeded.

Another daunting and politically sensitive task of the current stage of Russian economic reform lies in the sphere of privatization. Despite all the difficulties and obstacles, the government is pushing ahead with a bold and ambitious privatization program, intending to sell more state-owned factories, plants and other property in a month than Margaret Thatcher privatized in a decade.

This approach has become a matter of political controversy with some opposition factions alleging that the speed and scale of the privatization campaign are leading to economic chaos.

Nevertheless, transformation of a country of proletarians to a country of proprietors has already begun. To intensify this process the entire Russian population of 150 million people is being given a chance to become shareholders in the former state-owned enterprises. The distribution of privatization vouchers has been launched and will go through several stages.

By the end of this year, 6,500 large companies are expected to register as joint stock companies and begin offering shares in auctions to the public in exchange for both vouchers and cash. Auctions are due to begin December 1.

Foreigners are free to participate in the auction process alongside Russian citizens. Various restrictions apply to some enterprises in the defence and energy sectors.

As you can see, even this sketchy outline of urgent measures to be implemented in the current phase of our economic reform clearly shows that the scale of modernization still required by my country is staggering. At the same time, it represents an extremely wide window of opportunity, both for the citizens of Russia and business people from abroad.

It goes without saying that the fate of the reform will inevitably be determined mostly through domestic effort. Western assistance alone cannot solve the unprecedented economic problems that Russia is now facing. But by the same token, my country stands a much better chance of solving these problems with adequate levels of outside help.

I hope you would agree with me that, for the world at large, reforming Russia is the most important economic challenge since the reconstruction of post-war Western Europe. However, despite the geopolitical imperative of preserving stability of what is, and will remain, a nuclear superpower, the scale of Western assistance to my country still looks less than generous and far-sighted. Let me expand on this because it is important.

The current Russian crisis is so unique that remedies to it cannot be found in traditional textbooks. Nor is it about underdevelopment and impoverishment, although few would deny visible signs of both everywhere.

Russia is currently undergoing a deep and acute identity crisis which touches the very fundamentals of our society. In view of this basic fact, many prescriptions emanating from certain international financial institutions on how to reform the ailing giant look a bit too simplistic and superficial.

First of all, with respect to the speed of our economic reform, one shouldn't forget that it took centuries to develop Western market economies. Further, it appears that quite a few of those prescriptions are based on the efficiency of Korean, Taiwanese and other Dragons' economic models whose relevance for Russia is yet to be proven.

Even if it is so, one shouldn't ignore strong non-market elements such as subsidies and protectionist tariff barriers, which contributed to growth in Korea and Taiwan. In this context one can dispute the wisdom of a scheme which envisages our rapid and forced landing into a classic straitjacket of Western economic policies, which at the moment are not fully suitable for Russia's unprecedented situation.

Similarly, macroeconomic stabilization shouldn't be made a condition for Western assistance. In my opinion, it should rather be viewed as its expected consequence. Obviously, external assistance without strings attached can only be found in the perfect world of fairy tales. However, such strings as are necessary should be realistic and specify attainable targets.

By waiting until the Russian economy demonstrates its ability to succeed, the West increases the chances that the crisis may go deeper and be longer with all sorts of negative results. I believe it is in the vital interest of the West to act more decisively.

Ladies and gentlemen, official relations between Russia and Canada were established 50 years ago. Looking back, one can only regret how precious little was actually achieved in the field of our bilateral economic interaction and how many chances were missed.

Today, with the end of the Cold War and old bloc divisions and rivalries, we stand a real chance of making up for the time lost. Putting aside our mutual fight against the Nazi threat during the Second World War, Russia and Canada at last find themselves on the same side of a barricade for the first time since the inception of our bilateral relations.

And this comradeship doesn't stem only from our striking geographic and climatic similarities, and our close proximity. Post-Cold War Russia and Canada are now united by the same values and aspirations, by the high degree of coincidence of interests, unimaginable just a few years ago.

There is every reason to speak of an emerging spirit of genuine partnership between our countries as vividly demonstrated this year by two visits of President Yeltsin to Canada and by the Treaty on Concord and Co-operation between Russia and Canada which was signed in June and has just been ratified by the Parliament of the Russian Federation.

And this is very important since unanimity is indeed a very rare phenomenon in our Parliament and reflects what the broadest cross-section of Russians really think of Canada and of our relations with your country.

Russian-Canadian political relations--and they are in very--good shape now--should be complemented and further reinforced by the widest possible, mutually beneficial, economic relations. No one would argue that foreign investments in Russia do not involve some risk. But the risks pale when measured against potential gains, both for Canadian companies doing business in Russia and for Canada.

Suffice it to mention, that the Cold War against a hostile government with nuclear weapons was costing Canada alone $3 billion annually in defence expenditures.

As you know, our bilateral trade relations have seen many ups and downs. Presently, we witness a definite upturn in economic interaction between our two countries. Russia is a land of tremendous and still largely untapped opportunities, practically in every sphere of Russian economic life. It is the economy of an awakening giant and those who would be the first to explore this burgeoning market can reasonably expect to reap the biggest gains.

In conclusion, I would like to stress that this upturn in Russian-Canadian relations has all the prerequisites to make us not only good neighbors but genuine partners--partners in opportunity and partners in the economic success that flows from free and fair co-operation at all levels.

The appreciation of the meeting was expressed by John Freyseng, Partner, Blaney, McMurtry, Stapells, and Third Vice President, The Empire Club of Canada.