The economic situation in Belarus, Russia and Ukraine
Doc. 7453
11 January 1996
REPORT[1]
Rapporteurs: Mr BLAAUW, Netherlands, Liberal, Democratic and Reformers' Group and Mr NOV�K, Czech Republic, European Democratic Group
Summary:
The report expresses strong support in favour of a continuation of economic reforms in Belarus, Russia and Ukraine, especially as signs appear that the pace may be slowing down. It draws attention to the importance for economic development of democracy, human rights, the rule of law, political stability, concern for the weak in society, protection of the environment and clear legislation, especially in the economic field.
Continued and better co-ordinated assistance, especially at the conceptual level, is needed on the part of the international community, as are open trade relations among the three countries as well as with other countries in the region, including western Europe. Europe and the world at large, the report concludes, has a vital stake in the success of the reform efforts in the three countries in question, for its security and long-term prosperity.
I. Draft resolution
1. Four years after the break-up of the Soviet Union, Belarus, Russia and Ukraine (a Council of Europe member state) are struggling, like other successor republics, to establish market economies. For themselves, their neighbours and for Europe as a whole, it is essential that they succeed.
2. After a period of difficulties and setbacks - varying according to the different situations and policies in each country - the realisation is taking hold that lasting recovery is possible only with macro-economic stability, especially a reduction in budget deficits and inflation, as well as further privatisation of state enterprises and the liberalisation of prices and trade. It is vital that this course be pursued, not least in order to attract foreign investment and reduce capital flight abroad.
3. Democracy, human rights, the rule of law and political stability are fundamental to lasting economic development and the formation of a "civil society". It is particularly important to establish an authoritative judicial system equipped with the necessary material means, and to enact and implement clear and transparent economic and business legislation in such areas as property rights including on land, taxation, banking, accounting standards, contracts and bankruptcies. Streamlining government authority, stamping out corruption and combating economic and other crime should be additional priorities.
4. It is essential that sufficient resources be set aside during the economic reform process to protect the weak and vulnerable in society, especially the elderly, and to preserve the environment.
5. The Assembly reaffirms the Council of Europe commitment to continued assistance, especially conceptual assistance, in these efforts, within the framework of its cooperation with institutions such as the European Union, the OECD, the European Bank for Reconstruction and Development, the International Monetary Fund and the World Bank.
6. The Assembly is concerned that agricultural reform in the three countries is advancing slowly or not at all, and that military expenditure continues to drain state budgets, thereby severely compromising economic development. While aware of the particular difficulties associated with reforms in these areas, the Assembly nevertheless believes that they must be tackled urgently.
7. The Assembly believes that reform is particularly important in the field of education and the retraining of the work force, to prepare those concerned psychologically for the market economy. Without a fundamental change in society's approach to organisational efficiency, material resources will not translate into economic development;
8. The Assembly encourages the three countries to establish as close, open and balanced economic relations with each other as possible - as well as with other countries in the region - especially in view of their geographical proximity. The Assembly considers as a priority the establishment of an adequate infrastructure for both city and countryside, especially in transport and communications.
9. Finally, the Assembly calls on Council of Europe member states:
i. to avoid any protectionism, including in agriculture, in their economic relations with the three countries in question or any others in the region, thereby promoting the eventual creation of a "pan-European common market" as called for in the Assembly's Resolution 1036 (1994) on the progress of economic reform in central and eastern Europe: lessons and prospects";
ii. to adapt assistance to the three countries concerned, as well as to others in the region, to new realities, through better co-ordination among governments and international, as well as non-governmental, organisations.
II. Explanatory Memorandum
by MM. Blaauw and Nov�k
Contents
II. The Difficult Road To a Market Economy
a. The "Inter-Republic Dimension"
b. General Economic Developments since 1991
Russia
Belarus
Ukraine
c. Framework Conditions
d. International Support
I. In September 1994, Mr Townend and other members of the Assembly presented a motion for a Resolution on the economic situation in Belarus, Russia and Ukraine (Doc. 7162). The motion stated that "the economic reforms in [the three countries in question] have brought with them, alongside successes, a number of serious problems linked to the transformation from a state-controlled to a market economy". It calls the economic and social situation in these countries "precarious, with vast conse�quences for Europe and the world in the event of failure".
II. The motion calls on the governments of these countries "to make full use of the expertise and other assistance offered by the Council of Europe and the European Union to pursue the establishment of a democratic, civil society, and a market-oriented economy which is not only economically efficient but also socially just and protective of the environment". Finally, it invites the European institutions, together with other international organisations, to "intensify their efforts to provide assistance and co-operation toward economic and social reform to Belarus, Russia and Ukraine, in order to achieve stability in the region and beyond, and contribute to the full and beneficial integration of these countries into the world economy".
III. This report draws on intensive and constructive discussions in the Committee on Economic Affairs and Development over several months. In addition, in October 1995 a sizeable delegation of the Committee was able to participate in a Conference involving the countries of the Community of Independent States (CIS) in Saint Petersburg, organised by the CIS Interparliamentary Assembly on the theme "Economic Reforms in CIS countries, and Their Influence on Integration Processes in Eurasia".
IV. The Rapporteurs seized this opportunity to carry out about a dozen visits in the St Petersburg region, to companies and government services: an agricultural cooperative, a major defense manufacturer trying to convert to civilian production, an insurance company, a bank, a clothes manufacturer successfully targeting both domestic and West European markets; and a port. These visits were essential to understanding the deeper meaning and scope of current reform efforts in Russia, and the problems encountered. One of the Rapporteurs was also able to visit Ukraine, and several Assembly colleagues contributed their impressions from Belarus. In this way, it is hoped that the report will be reasonably complete and well-rounded in its attempt to cover an extremely complex subject.
II. The Difficult Road To a Market Economy
a. The "Inter-Republic Dimension"
V. Structural reform in the former Soviet Union area was almost bound to result in even greater pain and hardship than in other post-communist countries. Among the reasons one may cite: the "inter-republic" dimension (ie the splitting up of the Union into 15 independent republics); the previous all-encompassing reach of the state in economic, political and civil life; the nearly complete elimination of market relations and of private property, not least in agriculture; the long (70 years) virtual isolation from world markets; the extent of the distortions in industry due to the absence of markets; and the size of the military complex. The depth of the recession that struck the three countries (as well as other successor republics of the Soviet Union) in 1992 thus confirmed that the sacrifice involved in the transition to a market economy would be higher than in Central and in other parts of Eastern Europe.
VI. In addition, the launching of numerous different, ambitious reform plans generated confusion about the aims and suitable pace of economic policy, especially since most of them were never fully, or even partly carried out. In this regard the reform failures and errors of the early 1990s contributed significantly to the deterioration in the macro-economic picture facing the new authorities in 1992.
VII. The political scene remained very unstable after the demise of the Soviet Union. One main reason was, that the radical economic reforms and stabilisation policies launched by the government in January 1992 met with such fierce opposition from the conservative industrial lobby.
VIII. The struggle between the "centre", ie Moscow, and the "break-away republics" began already in 1990 to interfere strongly with the process of economic reform, leading at the end of 1991 to the dissolution of the Soviet Union. The agreements of Beloviej in December 1991 - outlining a modus vivendi among the successor republics - introduced a new era in the history of Eastern Europe, but they also had certain unfortunate consequences in the economic field, not least for the three countries under study in this report.
IX. A significant cause behind the disintegration of the USSR at the end of 1991 was the withholding, by the constituent republics, of revenue from the federal budget - in itself a result of the tax reform in April 1990, which shifted significant fiscal power to the regions and increased their economic autonomy. Such local and regional assertiveness against what was perceived as excessive central control and domination also characterises the Russian Federation and many of the other Commonwealth of Independent States (CIS) members.
X. Thus, the collapse of the "Comecon" (Council for Mutual Economic Assistance or CMEA) trading regime with central and eastern Europe was followed by a disintegration of traditional inter-republic ties within the Union. In addition, the newly created states were not ready and able to pursue at short notice an independent financial policy, since they all depended on the centrally (ie by Moscow) issued rouble. The costs of this, what one might call "institutionalised monetary irresponsibility", were high. Ten of the fifteen former Soviet republics experienced hyper-inflation in 1993. Only the most boldly reforming countries - the Baltic states, Russia and Kyrgyz Republic - escaped the worst of the hardship. Generally speaking, monetary instability to a great extent contributed to the decline of production in all the USSR successor republics.
XI. After two years of destabilising ambiguity in the currency field, with several central banks in the ex-Soviet Union successor states issuing roubles, the rouble zone was finally dissolved in 1993. By now, Russia has effectively "nationalised" the rouble, and has encouraged all the other republics to introduce their own currencies. This being said, the economies of Belarus and Ukraine still very much depend on the rouble, and trade among the independent states continues to be dominated by the Russian currency and barter. In addition, the Belarussians and Ukrainians also largely prefer the rouble, also because their new national currencies are not yet convertible.
XII. Controversial proposals for monetary union and subsequent reunification with Russia have been put forward by the Belarussian government since mid-1993. A draft agreement for monetary union with Russia was published by the two governments in 1994 - leading, in Russia, to the resignation of two radical reform ministers who argued that such a union would place an unacceptable burden on the Russian economy and cause additional inflation.
XIII. Russia, Belarus and Kazakhstan signed agreements in January 1995 foreseeing a potentially far-reaching customs union between the three republics, and they vowed to take additional steps toward economic integration. Under the agreement, all members of the planned system would have to unify their economic, monetary, foreign trade policies in line with market reform. All restrictions on mutual trade in strategic raw materials would be lifted, followed by unified foreign trade regulations and customs duties.
XIV. Similarly, in February 1995 Russia and Ukraine stepped up military co-operation efforts by forming an industrial group to build aircraft, sell arms and supply parts for the aerospace sector. The creation of the consortium - bringing together military-industrial enterprises hurt by the Soviet Union's collapse in both countries - marks the first large joint effort in this field, and reflects an increasing thaw in long-strained relations between the two largest former Soviet republics. This military agreement follows preliminary agreement on a settlement of Ukraine's gas debt and a co-operation treaty on the sharing of the Black Sea Fleet among the two countries.
XV. Several members of the Committee have pointed to a "brain-drain" affecting the three countries. This refers on the one hand to many educated people leaving for abroad, especially western countries. But it has also resulted in there being relatively few educated managers in the top echelons of privatised or still state-owned companies. This is risky, in the sense that companies could well collapse if these people were suddenly to leave or stop doing their best, say because they are demotivated or intimidated in carrying out their work.
b. General Economic Development Since 1991
XVI. Privatisation and Restructuring. One of the greatest challenges for the economies of Russia, Belarus and Ukraine lies in the privatisation of state property. The very notion of a private sector was non-existent in these countries during more than 70 years of communism.
XVII. The first steps towards the opening of the market occurred during the "perestroika" years, notably through a "joint ventures" programme with foreign firms. Collectives of employees were given a major role in decision-making, and direct links with foreign enterprises were supported. At the same time, the government started encouraging private initiatives through the system of cooperatives. A "Law on Property", enacted in December 1990, recognised private property and ownership.
Russia
XVIII. Restructuring and privatisation of industry in Russia have relied heavily on so-called "vouchers". These are shares, each worth 10 000 roubles, that were distributed among the whole population, with every citizen having the right to keep, sell or invest them. Over 600 investment funds have emerged as a result of the voucher privatisation programme, which was wound down at the end of June 1994. According to Mr. Chubais, then Minister in charge of privatisation, the programme achieved the formal transfer to private ownership of about 70 percent of the large and medium-sized industrial enterprises. Some 90.000 small shops and businesses have been sold off since market reform started two years ago - representing 80 percent of all enterprises with less than 200 employees. More than 40 million people are reported to own shares in private enterprises.
XIX. Responsibility for the subsequent reorganisation of enterprises has been left to the new owners. A recent World Bank study found that about half of newly privatised firms changed their product mix in 1993, while approximatively two-thirds introduced new, incentive-oriented remuneration schemes and reduced their work force. The next phase of the privatisation programme will focus on cash sales (by auction) to strategic investors.
XX. Many outlying districts are based on a single enterprise, often linked to the military-industrialised complex. Unemployment there also involves the highly skilled part of the work force. The renewed rise of the military-industrial complex can in part be explained by the need to find work for the unemployed in such districts, which as a consequence may not be in favour of economic reform.
XXI. The Rapporteurs believe that the 1995-1996 period is becoming a turning point - a sort of "make-or-break" time for the country - when the Russian government may (or may not) at last succeed in stabilising the country's economy by sticking to an austere budget which was pushed through parliament and won approval from the International Monetary Fund. (Previous attempts to control inflation failed when the government caved in to demands from industry and agriculture for cheap state credits.) Monthly inflation came down to 6.7% in July 1995 from 18% in January, enabling the Russian government to promise to keep the rouble within a "corridor" of 4 300 - 4 900 to the dollar. Russia has thus joined Hungary, Poland and Czech Republic in the ranks of post-communist countries with an "exchange-rate anchor", even though doubts remain as to whether it will hold. The Russian central bank is having to assist several commercial banks which used to speculate in the rouble-dollar exchange but which are less able to do that in a more stable currency environment. This assistance may add to inflation, as may government aid to Russian agriculture (the 1995 harvest was the worst in two decades due to drought).
XXII. In March 1995, the Russian government reached agreement with the International Monetary Fund for the released $ 6.5 bn in financial assistance to back Russia's economic stabilisation programme. The loan constitutes the first large-scale package of aid assembled by the IMF for Russia, and one of the most important assistance programmes ever launched by the Fund. (On previous IMF and other international assistance, see the Chapter II d). Russia's total external debt is reported to stand at 113 billion dollars, while the country's gold reserves are down to 120 tons (largely due to the necessity to pay for food imports). At the same time, the outflow of capital is considerable and constitutes a permanent drain on the budget.
XXIII. The money will be of the utmost importance for the Russian economy, but its symbolic importance can be even greater. The IMF has pursued lengthy and difficult negotiations with the Russian governments, overshadowed only by the confusion and upheaval in Russian politics. The political and economic elements are tightly interwoven, with IMF officials assessing political developments as much as economic criteria.
XXIV. The new IMF loan, known technically as a "standby-loan", requires a higher level of performance, a more detailed agreement on fiscal and monetary targets and a higher degree of accountability on the part of Moscow than was the case with previous loans. In return for allowing Russia to draw down its full quota of loans, the Fund insists on a realistic budget and programme of economic stabilisation. In the past, Russia got smaller, special loans for its "systemic transition" that circumvented the Fund's normal rules and required little more than Russian promises, normally broken, of economic rectitude. The money, which will be paid out on a monthly basis so that the Fund can be sure the government is keeping the economy on track, is already included as revenue in Russia's 1995 budget.
XXV. Russia's attempts at reform and economic stabilisation were, and still are, further compromised by the tragic warfare in Chechnya, both due to the military costs as such and to the severing of economic ties in the region (important oil and gas transportation routes go through Chechnya, and in addition the region has a significant oil and gas production of its own). It can only be hoped that eventually real peace will come to this torn region. One member of the Committee expressed the further hope that this war, which he called a criminal undertaking, would serve to illustrate that military force cannot solve economic problems.
XXVI. The war in Chechnya did not significantly affect the determination of the main international financial institutions to continue large lending programmes to Russia. However, in March 1995 the European Union, decided to postpone indefinitely the signing of a trade accord with Russia, arguing that the Union needed clear signals on respect for human rights before going ahead with the pact. This decision is in conformity with the Assembly's Resolution 1060 (1995) on development cooperation policies, which invites Council of Europe member States to "[refrain] from giving other than humanitarian aid to warring countries" (paragraph 8 i).
XXVII. At the same time Russia is making considerable efforts to renegotiate its foreign debt with financial institutions and banks. In July 1995 Moscow and the so-called London Club of creditors preliminarily agreed to restructure Russia's debt over 25 years. At about the same time, in Paris, the International Organisation of the Committees on Shares decided to admit the Russian Federal Committee on shares and financial markets. This decision was an indication that the Russian securities market is on the right path toward fulfilling international standards, and that it holds promise for foreign investors. To this end, a facility is to be created to enhance investor confidence in the Russian capital market. Such an institution, partially sponsored through a World Bank loan, will be aimed at protecting investors' rights, which are not fully guaranteed by the current legislation. Furthermore, this facility may induce some Russians with funds abroad to repatriate them in order to finance domestic investment.
XXVIII. Industrial production. According to official statistics, Russia's GDP contracted by 19 per cent in 1992 and 12 per cent in 1993. The decline in GDP accelerated to 15 per cent in the first half of 1994. However, the GDP appeared to stabilise in the second part of 1994. Other positive signals include an increase in real disposable income and a 3% increase in retail turnover. These facts seem to indicate that Russia's post-communist recession may be reaching its end. Some sources, such as the Intelligence Unit of "The Economist", forecast a small fall in GDP of about 2% in 1995, followed by growth of 3% in 1996. Registered unemployment is still below 2 per cent, but by ILO standards it has reached 6 per cent of the workforce.
XXIX. A frantic concentration process is under way in Russian industry, with some powerful and potentially very wealthy industrial companies emerging that could in future dominate the Russian economy much in the same way as giant corporations helped shape the US economic development in the 19th century. Such conglomerates are above all forming in oil, gas, mining, metals, and telecommunications, and they are increasingly sought after by foreign investors. For instance, Gazprom, the former state-owned monopoly in natural gas, controls more than 30 % of the world's known reserves of that resource.
XXX. The formation of economically powerful and quite independent regions (including in the foreign trade arena) - such as the districts of Cheljabinsk, Sverdlovsk, Irkutsk, Novosibirsk and several autonomous republics - has created new problems, in that the central Russian government is trying to compel them to act within the unified framework of the state economy and in strict subordination to it.
XXXI. Another major problem will be the restructuring of the industrial sector. At stake is whether Russian heavy industry, the heart of the old Soviet economy, can be forced to adapt to the market economy. Although a bankruptcy law came into force in March 1993, its implementation at company level leaves much to be desired. It is heartening to note, however, that the new head of Russia's bankruptcy agency, Mr Mostovoi, pledged, in early 1995, to be tough with insolvent companies. He said that insolvent companies destabilise the economy by absorbing capital that could be used more productively elsewhere, and that they require state subsidies which only fuel inflation. These companies have also contributed to the "non-payments crisis" which plagues Russian industry because of their inability - or unwillingness - to pay their bills.
XXXII. However, the social and political consequences of liquidating bankrupt companies would be serious, since numerous Russian cities are entirely dependent on one or a few enterprises. Company closures are also hampered by the absence of an adequate social safety net for workers. The latter are often kept on as formally employed, even though they may not receive wages for months on end. There are now 1.71 million people officially registered as unemployed in Russia, although that figure would be several times higher using the International Labour Organisation's counting methods. According to forecasts, the number of officially registered unemployed could rise to 10 million by early 1996.
XXXIII. The Russian government, aided by the World Bank, is attempting to strengthen the social safety net to cope with these problems. The Bank's representative in Moscow declared recently, that as much as $ 1 bn of bank funding could be forthcoming in order to back projects to relocate and retrain workers.
XXXIV. One major problem for Russia is finding a way to reduce the burden posed on the State budget and the overall economy by what is commonly referred to as the "military-industrial complex". Briefly, it costs the country so much to keep men in arms and produce weapons and other military material that little remains for productive investment, or for providing a minimum social safety net to citizens during the reform stage.
XXXV. The Rapporteurs, during their visit to St Petersburg, among other things heard about some nearly forty, largely underground, "secret cities" with about one million inhabitants, which it is very hard to convert to civilian production as they are located in remote areas, say in the Urals. We believe that the reduction of military outlays should form a priority task in the reform process in all the three countries concerned, but above all in Russia.
XXXVI. They visited one major company in the St Petersburg region that used to be an important supplier of military equipment. It is now busy reorienting its production, and has been relatively successful in selected areas such as navigation equipment for civilian aircraft. However, if in 1990 the company employed 50,000 people, today the figure is still 40,000. Similar companies, most of which have not reached as far, are to be found all over the country.
XXXVII. For other companies, this situation is often brighter. The Rapporteurs visited a textile manufacturer in central St Petersburg which showed us "new machinery within old walls". In the past it used to produce uniforms for the Ministry of Defense, but already in the early 1990s contacts were established with foreign companies. At present the firm, which is now owned essentially by its employees, exports around 70% of its production abroad. In this company, as in many others visited, one complaint was the excessive time taken up in meeting the bureaucratic requirements of the local and national authorities. It has to pay fourteen different taxes, as well as contribute to four different social funds. In conclusion, apart from being a serious burden on profits the multitude of taxes seriously hampers the operations of many companies in Russia.
XXXVIII. The complaints we heard during the other visits in the St Petersburg region may be summed up as follows: Give us a stable legislative framework, and one which is drawn up by people who know the conditions in our particular industry. Furthermore, give us a less complicated, and if possible a less burdensome, tax system. Finally, streamline the different branches of government, so that we can get on with our business activities.
XXXIX. Agriculture. The question of the ownership of land is crucial to the privatisation process, and a radical reform of agriculture is considered essential in all the three republics. At the beginning of the 1990s, legislation introduced in all three countries opened up the possibility for private citizens to acquire land on certain conditions. This opened the way for the creation of a private sector in agriculture. However, the process is slow. In Russia, for example, only about 5% of total agricultural land was in the hands of private farms by mid-1994.
XL. As regards Russian agriculture, a major step was taken through a presidential decree of October 1993 permitting the sale of land to private farmers. This notwithstanding, agriculture remains the least reformed sector of the Russian economy. This has dire consequences, for the demands for government subsidies from the powerful agrarian lobby are one of the biggest obstacles to the efforts to implement the stabilisation programme.
XLI. As if to undo the October 1993 decree, the Russian government in February 1995 passed another one which threatens to block completely the continued privatisation of agriculture. It can be seen as yet another show of force by hardliners in the government opposed to rapid economic reform.
XLII. Most former collective farms have been transformed into joint stock companies, in which each former member of the collective has a nominal right to a certain amount of land. The new decree obliges farmers who want to go private and buy collectively owned land to obtain the consent of all present and former members of the collective farm in question. It is enough that only one member is against for the initiative to be blocked.
XLIII. To this comes that the procedure for registering one's wish to acquire land is exceedingly complicated and can be halted by many different authorities. And if some intrepid farmer should nevertheless succeed, there are innumerable examples of his or her being discriminated against by the established agrarian, ie collective, interests when it comes to supply of inputs, use of machinery or transportation of produce.
XLIV. The Rapporteurs were able to visit a major agricultural cooperative outside St Petersburg. We were struck by the open-mindedness of the management and by its eagerness to pursue reform. One manager said that the change started in the early 1990s had "forced us to start thinking on our own". By now, the cooperative is thinking almost entirely in business terms. For instance, seed was bought from abroad rather than from the cooperative itself when this was found to be the better alternative. In sum, this cooperative was confident about the future and seemed imbued with a desire to adapt itself fully to the market. However, the Rapporteurs are not certain as to how representative this cooperative is of present-day agricultural Russia.
XLV. If the Rapporteurs have dealt with agriculture at some length, it is because of its great significance for the eventual success of the general economic reform efforts in Russia. The halt to agricultural privatisation is a sobering indication that the Russian government, for all its reform promises, is in the process of turning back the clock and undo many of the achievements reached in the first post-communist years of 1992 and 1993. The private ownership of land is by no means a "luxury" part of the reforms, one that if necessary could be dispensed of. On the contrary, it is probably the most important ingredient in the overall structural reform effort. The transfer of unproductive agriculture to more productive private farmers is seen by most experts as absolutely essential to the transition process.
XLVI. How Russia will be able to pursue its general reform programme without continued agricultural privatisation is not clear. The old-style agrarian lobby is stronger than ever. It derives its strength from a wave of deep disappointment in the countryside with government policies aimed at stemming the flow of subsidies that have traditionally gone to the agricultural sector. One member of the Committee even spoke about a "chasm" between city and countryside in Russia, and warned that it will have to be narrowed before lasting economic development becomes possible.
XLVII. Furthermore, Mr. Alexander Nazarchuk, Minister of Agriculture, has recently declared that without fresh state subsidies and protectionist trade policies, the largely unreformed agricultural sector would soon suffer "a complete and final collapse". In 1994, Moscow caved in to similar pressure from the agrarian lobby, issuing cheap credits which western economists say were one of the main sources of the renewed burst of inflation that followed. The Rapporteurs believe that one of the toughest challenges to the Russian government's third and upcoming attempt at stabilisation will be to resist pressure to bail out once again the agricultural sector. The issue takes on new urgency in view of the poor harvest of 1995.
XLVIII. Energy. The Russian Federation has inherited a costly environmental legacy after decades of inefficient economic development under communism, which basically failed to include environmental factors in macroeconomic strategies. As the country searches for new sources of growth and comparative advantage, it may use natural resources such as forests, lands, oil, gas, minerals, water and vegetation much more intensively. Decision-makers will then have to price carefully existing natural resources, in order to avert further environmental degradation or depletion.
XLIX. The industry and energy sectors are the major sources of atmospheric pollution, although road transport is also becoming an increasingly important source in urban areas. As regards industrial hazardous waste, the first nationwide inventory was published in 1990, based on data collected in 1989 by the State Committee for Statistics. Since 1990, work has continued within the Ministry of Environmental Protection and Natural Resources and associated institutes on a national system for hazardous waste management, including improvement of the waste classification system.
L. Due to a lack of resources, however, it has not been developed to a level required to support a regulatory management system. This is considered a prerequisite for compliance with the Basel Convention on Transboundary Movement of Hazardous Waste, which is considered a bench mark in assessing progress toward international standards. The Russian Federation has signed but not yet ratified this convention.
LI. Russia's oil sector, essential to the country's economic reform efforts, has a history of spills. One of the world's largest oil spills occurred in the Komi region in 1994, with serious leaking from the Kharyaga-Usinsk pipeline. Subsequent failures of temporary dams and dikes constructed to contain the oil resulted in significant environmental and health impacts on downstream communities. In excess of 100,000 tons (730,000 barrels) of oil are estimated to remain trapped in creek beds, three times the amount released during the Exxon Valdez spill. Unfortunately, the Russian government and Komineft, the pipeline operator, lack the resources to cope adequately with the problem. Release of the oil into the river systems could have serious consequences for downstream communities, as well as cause significant ecological damage.
LII. The energy and natural resources sectors are critical to economic development, since they strengthen the fiscal base, generate foreign exchange and help restore the country's creditworthiness. Even though Russia has a strong comparative advantage in these sectors, energy output is falling in every sector, with the possible exception of gas. Mining output is also on the decline, due primarily to insufficient incentives and investment.
LIII. Indeed, one of the principal criticisms of Russian economic policy relates to the failure to obtain significant tax revenues from the oil and gas sector. Western economists and the World Bank point out that in other countries with substantial mineral resources, such as Indonesia, revenues from the oil sector have played a major role in offsetting the costs of structural economic reform. In Russia, however, oil and gas companies enjoy substantial tax exemptions. Furthermore, Russia at present does not fully possess the administrative structure effectively to enforce tax collection. This inability to provide the state with sufficient funds to face expenses, including police services, may give rise to a situation in which law enforcement and democracy are in jeopardy. Tax collection, therefore, should be one of Russia's priorities.
LIV. In addition, the generally adverse investment climate in the economy as a whole is compounded in these sectors by additional legal and regulatory obstacles, and political fears relating to the future conditions for foreign investment. Given the risks, many potential investors are reluctant to make long-term commitments.
LV. Transport infrastructure. Telecommunications: The transport situation in central and eastern Europe, including Russia, is being amply described in the Committee's report on the activities of the European Conference of Ministers of Transport, currently under preparation. Suffice it to say here, therefore, that in the case of Russia distances are enormous and the transport infrastructure still insufficient.
LVI. During the Soviet era, different regions were ordered to concentrate on certain industrial activities, or even to focus on certain sectors of individual industries, say, different parts of a tractor. This led to huge transport needs. At the same time, road transport was disfavoured in comparison with rail transport, and the latter, while extensive, was not modernised. The result has been a relative inability to transport goods and people quickly and cheaply in a way that would meet requirements of a modern economy.
LVII. The situation in the telecommunications sector is slightly better, especially since the arrival of telecommunications satellites and mobile phones. However, it is one thing for two people agreeing over the 'phone to trade something, and another to move that something between them. For economic development it is therefore essential to develop the transport sector in conjunction with that of telecommunications.
LVIII. The Rapporteurs were able to visit one of the port authorities in St Petersburg. The management pointed to the difficulties of privatising the port, of insufficient ship-handling capacity, storage facilities, and road and railway access to the port area. One of Russia's problems in this field is that so many of the major ports built during the Soviet era are now outside Russia. Intensive contacts were, on the other hand, maintained with ports in other parts of Europe, and the Rapporteurs believe that such cooperation is essential in this and other sectors. Reform in this particular port is, however, hampered by the high taxes which it has to pay to various government authorities, amounting to 40% of profits. It is difficult to see how the necessary investment to improve facilities can come about in this situation.
LIX. The Rapporteurs also visited the St Petersburg municipal transport authority, responsible for the city's extensive underground network, trams and buses. Again, major improvements are urgently needed to improve the city's transport system, which in many regards is in advanced decay. Insufficient support from the central government, and scarce revenue from a bewildering array of heavily reduced ticket prices for about a dozen different passenger categories combine to make it extremely difficult for St Petersburg to modernise its transport system and hence develop economically.
LX. Foreign trade: The previous dramatic decline in Russia's trade with non-CIS countries has been brought to a halt. Exports have been growing since early 1993, while imports started to increase in the first half of 1994 following a virtual collapse in the 1991-93 period. In 1993 and the first three quarters of 1994 Russia produced an estimated foreign trade surplus of US$ 10.7 billion and US$ 9.5 billion, respectively. The balance of payments surplus for 1993 is estimated at US$ 6.2 billion. In 1994 capital flight slowed considerably. It can only be hoped that the many "free economic zones" that have been established will be able to serve as future "gateways" to the rest of the country.
LXI. Trade between Russia and other CIS countries fell by over 50 per cent between 1991 and 1993, and continued to contract sharply in 1994, bringing the share of CIS countries in Russia's trade down to only about 25 per cent. This was due in part to the reimbursement inability of most other CIS republics, in part to Russia's growing reluctance to continue to provide huge price and credit subsidies to its CIS partners. Furthermore, the non-convertibility of the currencies concerned does not facilitate commercial transactions.
LXII. It emerges from recent negotiations within the IMF and other fora that current efforts to assist Russia focus on two elements: fiscal consolidation and managed exchange rates. The former aims at reducing the overall level of public expenditure, whereas the latter attempts to provide the fragile rouble with a "fluctuation band" of 14 per cent. In September 1995, the IMF approved the setting up of a Currency Stabilisation Fund, which is intended to help countries in the region, in particular Russia. The amount for each country assisted is to correspond to its contribution quota in the IMF. As previous experiences illustrated, however, adjustment programmes are not perfect and require constant monitoring by the IMF during the implementation stage.
LXIII. To sum up, an enormous learning process is under way in Russia. It has gone far in certain segments of society, while in others it has barely begun to make an impact. The Rapporteurs came away from their study visit with the conviction that the main challenge is of a psychological nature. It is one of changing the attitude of the people at large from one of waiting for orders from above to a more entrepreneurial spirit. One of our interlocutors said that it all boiled down to the motto "The client is always right". Perhaps this is a simplification, but it probably contains a kernel of truth. At the same time, nobody we met expressed a desire to turn the clock back, to return to the Soviet type of command economy, although there were many different views of how the country should move forward.
Belarus
LXIV. In Belarus, reform has been hampered by political conflict, and by the strength of political forces suspicious of reform. Belarus was one of the industrial and agricultural powerhouses of the former Soviet Union, excelling in the manufacture of such things as trucks, tractors, radio equipment and farm produce. Slow to introduce market reforms, the country was affected even more brutally than many others, as it eventually decided to carry out the adjustment programme proposed by the two Bretton Woods Institutions. Measured in constant prices, its GDP fell dramatically, minus 9 per cent in 1993 and minus 21 per cent in 1994. As with other economies in transition, the introduction of price liberalisation have caused living standards to plummet, raising the spectre of social unrest. A reform of the social security system is becoming urgent, in particular to ensure that the burden of market reform is not shouldered principally by the vulnerable groups in the society.
LXV. Indeed, many Belarussians still find it hard to imagine an independent existence for this flat piece of earth with 10 million people and no naturally defined borders, and which used to be so totally integrated into the Soviet economy. Most of the big military plants, which at the time were responsible for over 70 per cent of industrial output, now stand idle, while the country remains almost entirely dependent on imports from Russia.
LXVI. President Alexander Lukashenko, elected in July 1994 on pledges to root out corruption and halt privatisation, had to rethink the country's future direction since President Boris Yeltsin refused to burden Russia with the costs of a new economic and currency union with his country. The 'programme of economic priorities' outlined by the President in September 1994, emphasised self-help and painful macro-economic stabilisation. The main aim of the programme, which has since won parliamentary approval, is to reduce monthly inflation from around 30-40 per cent to 10-11 per cent by the end of 1995, and to 7 per cent a year later.
LXVII. Due to the introduction of market reform, the Belarussian economy contracted sharply in 1994, with gross domestic product down 21 percent. The government now maintains the worst is over and predicts stabilisation in 1996. Figures released by the Ministry of Statistics indicate that industrial and agricultural output fell by 18 percent in 1994, and foreign investment by 31 per cent. However, the ministry forecast a decline of only five to seven percent in GDP for 1995. Industrial output is expected to fall by six to nine percent, while agricultural production is predicted to rise by between two and five percent.
LXVIII. Solving the country's economic problems requires encouragement of a private sector that hardly existed four years ago and which remains embryonic. Virtually all the major enterprises have remained under state ownership, with the exception of agriculture where small private plots account for approximatively one quarter of production. A small-scale voucher-privatisation programme started in 1994. It foresees the privatisation of two-thirds of state assets by 1997.
LXIX. To support the reform programme drawn up by the government, the International Monetary Fund in January 1995 agreed to grant Belarus the second tranche of its Systemic Transformation Facility worth 100 million dollars. (The 10-year loan carries an interest rate of 5.67 per cent.) The money will be used mainly to cover the deficit in the republic's balance of payments. (The first tranche of the IMF's Systemic Transformation Facility, worth US$ 98 million, had been granted to Belarus under similar terms in June 1993, and was used principally to repay the country's debt for Russian fuel.)
LXX. In May 1995, in a referendum reflecting widespread nostalgia for old certainties, 80% of voters backed a restoration of close ties with Russia. The big question is, however, whether market reforms will go forward. Policy reversals have already earned the scepticism of the IMF, which in March 1995 decided to withhold an agreed US$ 250m loan. The country has recorded the highest first-quarter inflation in the CIS (123.3%), and a presidential ban on investment funds has put voucher privatisation in doubt. Privatisation of big firms has not even begun. The Belarus President seems to look at economic integration with Russia as a substitute for reform.
LXXI. Some steps towards integration with Russia have already been taken. In June 1995, Russian customs officers started working at Belarus's borders to the West. But a more important deal on monetary union, collapsed when the Russian government realised that swapping the Belarussian currency for roubles at the rate suggested by the Belarussian government would have cost it over US$ 2 billion. That would have caused another surge in Russian inflation, and would have worsened the state of the already beleaguered financial system, which underwent a dramatic crisis in August 1995. Interbanking credit was frozen for over ten days, despite lending rates reaching 1000 per cent. Small wonder, then, that the Russian government is not even willing to carry on paying subsidies in kind to Belarus, which in 1994 consumed 11 million tonnes of Russian oil at US$ 40 per tonne - less than a third of the world price.
Ukraine
LXXII. The year 1995 may have proven a watershed in Ukraine's reform process, stalled for much of the time since independence. Measured in constant prices its GDP growth rate dropped sharply, reaching minus 7 per cent in 1993 and minus 24 per cent in 1994. The 1994 decline illustrates the formidable difficulties Ukraine is facing in trying to intensify the reform process. However, the end of 1994 saw significant political change in Ukraine. The new president, Mr. Kuchma, differs from his predecessor in at least two important respects. He favours closer political and economic relations with Russia, and he seems more committed to economic reform. Moreover, he realises the importance of trying to soften the blow to the living conditions of the people, a fundamental factor in the reform process.
LXXIII. In March 1995 the Ukrainian government reached an understanding with the International Monetary Fund for a stand-by credit of US$ 1.8 billion. The agreement, which has still to be approved by the IMF and the Ukrainian parliament, is crucial in meeting Ukraine's financing needs and in mobilising support for economic reform.
LXXIV. In addition to this credit, the agreement with the IMF will unlock the second tranche of a Systemic Transformation Facility amounting to some US$ 360 million. The World Bank is expected to contribute another US$ 600 million, while US$ 100 million will come from the European Union. Funds from the United States, Japan and European countries are expected to make up the balance, in order to fulfil the promise made at the 1994 G-7 summit of US$ 4 billion in western aid.
LXXV. At the same time, the Fund wants the government of President Leonid Kuchma to cut the budget deficit to a 'low single digit' level. That could be as low as 3 per cent, though the government's target is more in the vicinity of 5 per cent, compared with 8.6 per cent in 1994. The savings are likely to have to come by cutting support for such things as fuel, transport, and housing. Inflation - between 400 and 500 per cent in 1994 - was targeted to fall to 12 per cent by the end of 1995. Given the Ukrainian record so far, it seems unlikely, however, that inflation will be reduced so drastically in just one year.
LXXVI. The deal heralds a commitment by the Ukrainian government to overhaul a struggling economy that shrank by more than 15 per cent in 1994. The package, under negotiation for almost five months, holds Ukraine to tight fiscal and monetary policies and further price liberalisation. This will make the targeted inflation rate even more difficult to attain.
LXXVII. The policies required for the stand-by agreement provoked deep divisions within the government, but President Kuchma appears to have the upper hand as against the country's anti-reform groups. One political consequence was the resignation of the more conservative prime minister Vitaly Masol in March 1995.
LXXVIII. Ukraine's pledge to close the Chernobyl nuclear power station, and the country's call for financial aid of about US$ 4 billion, were on the agenda of the most recent G-7 meeting. Western countries have been deeply sceptical that such a sum can be raised to provide Ukraine with the gas-fired power station Ukrainian officials have proposed as an alternative to Chernobyl. The United States has extended US$ 700 million to Ukraine to encourage economic reform and help it dismantle its nuclear weapons. That makes Ukraine the fourth-largest recipient of US aid after Israel, Egypt and Russia. Moreover, in June 1995 Ukraine signed a landmark trade deal with the EU, the first concrete acknowledgement in response to Kiev's pledge to close Chernobyl.
LXXIX. However, for Ukraine adjustment is complex. Before independence from the former Soviet Union, some two-thirds of Ukrainian industry was integrated into the Soviet manufacturing system. Much of that was in defence, but demand for submarines, rockets and sophisticated military electronics has dried up. For Ukrainians, turning swords into ploughshares and rocket plants into trolley bus factories is an economic imperative, but easier said than done.
LXXX. Real gross domestic product fell by a fifth in 1994 compared to a year earlier, and although official unemployment is less than 1 per cent, one in five workers is idle. While the official GDP has plummeted, the 'shadow economy' is growing and could constitute as much as between 25 and 50 per cent of official GDP. The impact of the output collapse of the official economy was only partly offset by the growth in the informal sector. However, in 1995 economic activity seemed to stabilise. Inflation came down in 1994 from the record levels in 1993, but it is still high. In March 1995 consumer prices rose 11.4%. Meanwhile, total foreign investment by June 1995 stood at 556 million dollars, according to an estimate by the World Bank and the EBRD.
LXXXI. Some of Ukraine's economic problems stem from its dependency on imported energy, with payments in arrears to Russia and Turkmenistan amounting to 3.3 thousand million dollars. The balance of trade is going to continue to suffer as a result of the need to import fuel - and in order to keep the latter low the Ukrainians feel they have to keep their nuclear plants operating. In the first quarter of 1995, Ukraine continued to accumulate external payment arrears.
LXXXII. In October 1994 most export quotas and licensing requirements were abolished. Export licenses remained only for four important commodities (grain, coal, cast iron and metal scrap). In December 1994, all except those for grain were lifted. Similarly, a unified exchange rate was achieved for most transactions. An Estonian member of the Committee pointed to a recent free trade agreement between his country and Ukraine as a welcome step toward improved economic relations in the region.
LXXXIII. Although the law on the privatisation of state-owned enterprises was adopted in March 1992, little progress was reached until lately as regards large-scale privatisation. By early 1994 only about 4% of the 60 000 small-scale units to be privatised had been sold. Privatisation has been slow, though there are signs that it is now speeding up. The administration is planning to privatise some 8,000 medium-to-large enterprises in 1995. Most companies will be sold at auction, but about 100 big firms might be privatised via the country's fledgling stock exchange.
LXXXIV. For privatisation Ukraine has adopted the Russian and Czech model, by which each citizen receives a certificate entitling him or her to a share in a state company. Auctions for 57 companies are planned in five regions, to be followed by nationwide auctions. Bids can be made by individuals or pooled investment funds. The voucher scheme marks a fresh attempt to accelerate the sale of state assets and generate public interest in privatisation, almost three years after the first effort floundered in the face of political opposition. Ninety per cent of all assets are still owned by the state.
LXXXV. However, the government may find it a challenge to find enough enterprises to sell in order to build up momentum. The Ukrainian parliament is drawing up a list of some 5,400 enterprises in the coal, steel and chemicals sectors that would remain in state hands, due to their alleged strategic importance.
LXXXVI. An adviser to President Kuchma has called for early monetary reform, arguing that "only the implementation of a monetary reform will make it possible to carry out sweeping economic reform". Ukraine's new currency, the hrivnia, is meant to help stabilize the economy. Meanwhile, land ownership legislation is being considered.
LXXXVII. There may now, unlike in the past, be a real political will behind the Ukrainian reform programme. If implemented rigorously, it could constitute a decisive break with the past - one that Ukraine badly needs and the international community would welcome.
LXXXVIII. The attraction of foreign direct investment is a priority in all the transition economies. Although political instability and legislative uncertainty in CIS countries have often discouraged potential investors, the level of short-term foreign capital is on the whole increasing. Such a short-term capital inflow can, however, be a double-edged sword. It may destabilize financial and industrial sectors by creating the illusion that new capital will be available for the financing of long-term projects. However, this money is only committed for a very short period, not sufficient to guarantee the funds necessary to launch a long-term project. On the other hand, the project, referred to earlier, to create an institution protecting the rights of investors may help reduce Russia's chronic shortage of capital.
LXXXIX. The Russian law on foreign investment of July 1991 establishes the general framework for investors. Foreign investments are concentrated in sectors such as mineral resources (oil, gas, rare metals), communications and public services. In March 1994 the number of registered enterprises with foreign capital amounted to 13 000, contributing some 2 - 2,5 percent to the nation's GNP. At present the principal investors come from the United States and Germany, followed by Canada, Italy, Austria and China. Foreign portfolio investments amounted to about $ 1 billion in 1993.
XC. As for the Ukraine and Belarus, the level of foreign investment is as of yet more modest. Privatisation has been slower, and unlike Russia these countries do not have major reserves of mineral resources.
c. Framework Conditions
XCI. If many of the statistical data on the three countries in question look contradictory, then one explanation is that they in the main record only the official economy. Indeed, this is the reason why the Rapporteurs have, throughout the report, been extremely cautious in giving economic data on the three countries that must build on dependable statistics, for instance the national product. Estimates of the size of the "grey economy" range from 25 % to 40 % of the official economy. This renders the task of gauging the economic situation of those countries even more difficult, let alone ensure tax collection. In 1994 the government was able to collect only 60% of the taxes it had imposed.
XCII. The three countries are in urgent need of an adequate statistical database and an efficient tax collection system. That will not, however, be possible without a complete and enforceable legislation in the economic field. For one thing, the lack of clear accounting rules make it almost impossible to establish the real profit situation of companies, to the despair of not only the tax collector but also the potential shareholder, foreign or domestic. For shareholders there is the additional difficulty of registering share ownership, which may necessitate a journey to the distant city where a company may have its formal headquarters. Again, with a more complete and enforceable set of norms such complications could be avoided.
XCIII. The Rapporteurs firmly believe that fiscal reform must accompany monetary reform. For instance, Russia's tax-system is at present a mix of punitive marginal tax-rates, gaping loopholes, flagrant evasion and administrative neglect. We have already pointed to the frequent inability of the federal government to collect the targeted amounts of fiscal revenue. Regional authorities are increasingly reluctant to pass collected taxes on to the central government (which in the Soviet days was done automatically).
XCIV. With mounting decentralisation and regional autonomy, voluntary transfer of tax resources of the kind required would necessitate well-trained personnel, transparent and stable tax rules, and a commitment by all sides to fiscal arrangements agreed to. None of these conditions are, however, even remotely met in today's Russia, which still lacks a functioning tax regime and a credible state agency for monitoring tax code violations and enforcing penalties against tax evaders.
XCV. Criminal behaviour - from embezzlement to Mafia-like racketeering, "protection fees" extracted from businesses - is another obstacle to economic development, for it undermines public confidence in the reform process and deprives companies, and society as a whole, of funds needed for constructive purposes. More recently, in Russia in particular, business people and bankers have been assassinated. The killing of the respected businessman Ivan Kivelidi in August 1995 caused a demonstration in Moscow by many of his peers, who demanded better police protection and a better-functioning justice in order to apprehend the perpetrators of such crimes.
d. International Support
XCVI. As has already been indicated, Russia has reached an agreement with the IMF since the launch of the 1992 reforms. In support of its adjustment policies, Russia has received US$ 4 billion financial assistance from the IMF (US$ 1 billion as part of the stand-by arrangement in 1992 and two tranches of US$ 1.5 billion each of an STF loan in 1993 and 1994). If, as is hoped, the implementation of the structural adjustment programme goes according to plan, the previously committed US$ 6 billion stabilisation fund for the rouble could also be made available. With regard to the 1995 stabilisation programme, Russia is still negotiating with the IMF and the World Bank for additional funds.
XCVII. By mid-1994, cumulative World Bank disbursements to Russia totalled US$ 587 million, almost all from the first Rehabilitation Loan in 1992 (US$ 600 million). Nine other loans have been approved, representing a total lending commitment of US$ 2.3 billion, but no significant disbursements have as yet taken place. The Employment Services and Social Protection Project (US$ 70 million) and the Privatisation Implementation Assistance Project (US$ 90 million) were approved in 1992. The Oil Sector Loan I (US$ 610 million) was approved in 1993, followed by the Highway Rehabilitation and Maintenance Project (US$ 200 million), and the Land Reform Implementation Support Loan (US$ 80 million) over the first half of 1994. The Rehabilitation Loan II (US$ 600 million) to support a series of trade reforms and price and pro-competition measures is in the process of being discussed with the Russian authorities. However, the lack of reliable statistics often makes it impossible to draw proper conclusions as to the possible beneficial effects of such aid.
XCVIII. In addition to these lending operations, the World Bank has been playing a co-ordinating role in providing economic advice and funding technical assistance to Russia. Bilateral donors have been increasingly relying on the World Bank's co-ordination in particular areas, especially in environmental protection, health and community services.
XCIX. There is close co-operation between the European Bank for Reconstruction and Development (EBRD) and the World Bank, both having a common interest in promoting financial sector development and industrial restructuring. The EBRD's increasing focus on private sector operations is in line with its comparative advantage relative to other multilateral and bilateral agencies, as the latter (with the exception of the International Finance Corporation, the investment-oriented side of the World Bank Group) are more active in supporting macroeconomic and social projects in Russia. For instance, the four EBRD-financed sovereign loans were all prepared as co-financing operations with the World Bank.
C. In private sector financing, the EBRD and the IFC have been co-operating through co-financing arrangements. The initial IFC investments seek to support joint venture projects with a foreign investment component. IFC has invested US$ 94 million in four transactions, two in oil and gas, and two in the financial sector. For instance, the IFC assisted in designing and implementing Russia's first small-scale privatisation programme in April 1992 in Nizhny Novgorod. More recently a privatisation project involved assisting Nizhny Novgorod in designing and implementing a collective farm privatisation programme, which has become a pilot project for the national land privatisation programme. At the request of the Russian authorities, the EBRD and IFC will work together on strengthening the capital market infrastructure in Russia.
CI. The Multilateral Investment Guarantee Agency (MIGA) of the World Bank Group has concluded a standard agreement with the Russian government to facilitate the approval of MIGA guarantees. However, not all agreements that are crucial to making MIGA's guarantee programme fully operational have yet been concluded. MIGA issued its first guarantee in Russia in June 1993, and is currently processing several projects in manufacturing, telecommunications, oil and gas. Given the high degree of political uncertainty, MIGA's political risk insurance can play a catalytic role in promoting foreign investment in Russia.
CII. The Partnership and Cooperation Agreement signed in Corfu in June 1994 between Russia and the European Union provides a particularly favourable framework for economic relations between the two sides. It envisages European Union support for Russia to become a member of GATT, and contains a general commitment to the creation of an EU-Russia free trade area. The handling of nuclear fuels (a major concern of the EU) is to be brought under better control. Quotas on Russian exports to the EU, with the exception of textiles and steel, will be removed. One member of the Committee on Economic Affairs and Development coming from a country neighbouring Russia pointed out, however, that the country's efforts to gain better access to European markets would gain in credibility if it refrained from imposing high tariff barriers vis-�-vis its neighbours for what are perceived as political reasons.
CIII. Russia is the largest recipient of the grant-based assistance through the European Union's TACIS programme. The main objectives of this programme are to assist the process of social and economic transformation, and to further Russia's reforms. Between 1991 and 1994, TACIS has approved and is managing an ECU 637 million programme for Russia. In order to have a greater impact, these technical assistance activities are each year concentrated to a few regions. (Moscow and St. Petersburg in 1991, Samara and Tyumen in 1992. In 1993 the programme concentrated on the Urals and Western Siberia, and in 1994 on south-west Russia and Kaliningrad, apart from the activities aimed at the country as a whole.)
CIV. Setting an example of cooperation among international institutions, TACIS has recently agreed to commit resources to studies on the aluminium and steel sectors. The technical assistance will consist in the preparation of modernisation and restructuring projects in co-operation with major European companies. These could then become eligible for EBRD financing. Ukraine for its part in July 1995 reached an export-import understanding with the European Union, which however posed certain limits in the textile and metals sector.
CV. The Council of Europe provides valuable assistance related to economic development to the three countries in question, all of which have applied for membership with the Organisation. Legal cooperation (Demo-droit and Themis programme), local authorities (LODE programme), human rights and the countries' adhesion to various Council of Europe conventions are specially worth mentioning. The overall aim is to help construct a functioning "civil society" based on human rights, democracy and the rule of law. The Council of Europe has also examined the social consequences of the reform programmes, and the Rapporteurs believe that the organisation can provide useful advice also in this area.
CVI. If two of the three main pillars of Russian economic reform - liberalisation of prices and trade, and privatisation - seem to be on the whole proceeding according to plan, ultimate success will depend on whether the third pillar, that of macro-economic stability, can be adhered to. After a rather unstable 1994, when inflation soared, 1995 saw a lowering of inflation and a general stabilisation of other economic indicators. It can only be hoped that the most recent liquidity problems in the Russian banking system can be overcome without an increase in inflation and an abandonment of the strict economic programme supported by the IMF in particular, and the international community in general.
CVII. At the same time, political stability improved in 1995, reflecting a desire for it by millions of Russians after decades of oppression and years of tumult. It can only be hoped that the forthcoming presidential election, as well as the recent (December 1995) parliamentary election outcome, will not frustrate these ambitions. Part of Russia's problem is of a structural nature. Although it does not now have to subsidise neighbouring republics as much as in the Soviet days, its economy still presumes the existence of an empire. With that empire gone Russia has whole cities and factory complexes that ought not to be where they are, nor produce what they do. Huge bureaucracies, each with its (often long-disappeared) turf to defend, add to the inertia. Military, industrial and agricultural lobbies still wield a large and often damaging influence over the national budget.
CVIII. The Russian economic reform process is not immune to reversals. Foreign economic assistance in addition to that already provided would not seem necessary, especially considering the masses of money that leave the country each month, in large measure a consequence of political and economic uncertainty.
CIX. The most important systemic change is the current rapid shift from the shortage-driven, Soviet type economy to a demand-driven market system. Despite the economic hardship, Russia has at least the satisfaction of presiding over a transformation of its obsolete and command economic structure into a more hope-inspiring successor. The share of the private sector now exceeds 50 per cent of GDP. Markets provide the main co-ordination mechanisms for the economy. Consumer markets are reported to be saturated with goods - unheard of in Russia for decades. They are still unaffordable for most people, but high prices and high demand are traditionally transformed by the market into greater supplies which bring down both. Finally, the fact that services are now estimated to account for nearly 50 percent of the economy - with manufacturing at 42 percent - may be more indicative than data on the decline of industrial output.
CX. In sum, progress in both financial stabilisation and structural reforms is still tenuous. Since mid-1994 the Russian reform process has entered a new stage, with priorities shifting to reforms promoting enterprise restructuring. Although progress has been made in certain areas, the setbacks in agriculture is particularly disappointing and potentially disruptive to the whole reform process. Crime, including economic crime, pervades Russian society and eats like a cancer at the social and economic fabric. Even foreign investors now have to pay "protection money" to the local mafia, and some are leaving for this reason. Russia continues to present a difficult, although maybe in the longer term gradually improving, business environment.
CXI. Intimately linked to a country's economic development is the rule of law. Here it must be said that Russia's current police and system of justice are on the whole disorganised and demoralised, frequently corrupt and generally ineffectual.
CXII. The various post-soviet governments have striven to change them from the instruments of repression that they used to be into something different. However, the transformation seems to have got bogged down, with no consensus regarding their purpose and powers. If this condition continues, Russians may come to believe that democracy means confusion, and that respect for law signifies weakness.
CXIII. Russia is an inherently rich country, with immense natural resources and a well educated population. In less than four years, since the collapse of the Soviet Union, Russia's private sector has grown with a remarkable speed. After a sharp economic decline, a recovery now seems under way. However, this promise of growth and steadily improving living conditions depends on political and social stability. Uncontrollable, violent crime is turning into a greater threat to it than any political force now on the scene.
CXIV. Since the implementation of its reform programme, Belarus has suffered all the pains associated with a transition to a market economy, including drastic falls in living standards, trade and production. Privatisation of major state-owned enterprises will be the next challenge, and the government should be encouraged to move more boldly in this direction than has been the case up to now. On the other hand, Belarus has managed to maintain consumption at an acceptable level, and to keep its external debt within the reach of its financial capabilities. Even though the country's journey to economic stabilisation has hardly begun, there is some reason to hope that it will be able to mobilise the political consensus necessary to undertake it.
CXV. Ukraine in 1996 could do what Russia failed to do in 1992, namely implement radical stabilisation with western financial support. 1996 could prove a decisive year in Ukraine's reform programme, which has proceeded with extreme languor since its start in 1992. Maybe the political will is now there, since the lack of alternatives is becoming so obvious. The economic situation is, however, so difficult that further market reform will require a large measure of political unity in the country.
CXVI. Considering the three countries together, it can safely be said that they are all seeking closer economic relations with each other. Many of our discussion partners emphasised, that whereas during the Soviet era integration had been artificial, it would be highly counterproductive to have three such proximate countries now go their different economic ways. In other words, economic cooperation today has to be in harmony with, not go against, market principles, and it should be deliberately pursued by all the three countries concerned.
CXVII. Several Committee members felt, however, that trade relations between the three countries (and with other countries in the region) are not developing as they should, due into alia to red tape and tariffs of different kinds. And one Committee member thought that the CIS Parliamentary Assembly Conference held in St Petersburg in October 1995 (mentioned in Chapter I above) did not offer any really new departure in this respect.
CXVIII. Throughout the Committee's deliberations on this report, the need to ensure a minimum of social protection to the weak and vulnerable in society was emphasised. This was done not only out of compassion, but also because it was felt that without it the social cohesion necessary to see the economic reforms through will not come about.
CXIX. Russia has about 37 million pensioners, according to the country's Social Security Ministry. The average state pension is the equivalent of $55 a month. Often the payments are late because the government is strapped for cash. Many elderly people have seen their life savings wiped out by runaway inflation in the early years of reform that followed the collapse of the Soviet Union. For millions among them there is no hope of partaking of the fruits of economic reform. This winter is unusually cold, and many of them have to hawk their last belongings to buy food or heating.
CXX. Commenting on the headlong Soviet march to socialism sixty years ago, in 1933, John Maynard Keynes wrote about the "evils of insane and unnecessary haste. The sacrifices and losses of transition will be vastly greater if the pace is forced ... for it is the nature of economic processes to be rooted in time." The Rapporteurs believe this judgment to be no less valid today, as the 'Slav countries' of Belarus, Russia and Ukraine move in the reverse direction. Time is money in more senses than one.
Reporting committee: Committee on Economic Affairs and Development
Budget implications for the Assembly: none.
Reference to committee: Doc. 7162 and Reference No. 1971 of 3 October 1994.
Draft resolution unanimously adopted by the committee on 9 January 1996.
Members of the committee: Mr Davis (Chairman), MM. Rodrigues, Pavlidis (Vice-Chairmen), Andreoli, B�rsony (Alternate: Szalay), Behrendt, Benetatos, Billing, Mrs Blattmann, MM. Bloetzer, Bog�r, Mrs Burbien�, MM. Buzatu, Caballero, Mrs Calner, MM. Caputo, Cerqueda Gispert, Coviello, Mrs Degn, MM. Demiralp, Dokle, Mrs Durrieu, MM. Eyskens, Fenech, Dame Peggy Fenner, MM. Figel, Goop, Grimsson, Gusenbauer, Jagmetti, Kili� (Alternate: Kiratlio_lu), Kirilov, Kiršteins, Kol�_, Korkeaoja, Latronico, Le Grand, Leers, Liapis, Malinowski, Mautner-Markhof, McDowell, Minkov, Muravschi, Nov�k, Pahor, Pinto, Poppe, Puche, Radulescu Botica, Rippinger, Schmitz, Telgmaa, Townend, Uczkiewicz, Van der Maelen, Valleix, Mrs Verspaget.
N.B. The names of those members present at the meeting are printed in italics.
Secretaries to the committee: MM. Torbi�rn and Bertozzi.
[1] by the Committee on Economic Affairs and Development