OUTLOOK FOR RUSSIA
There
are two very different views on Russia these days. One is that on the wings
of democracy and free market reforms, slowly but surely the country is moving
towards capitalist heaven.
And then there's
the view that the country is going full speed to hell - accelerated by manipulative
politicians and ill-conceived reforms.
Both views have
something going for them. The truth, as usual, is to be sought in the murky
area between.
Russia's economic
stabilization in 1996 will be a turning point toward astonishing advances
over the next two years. The mainstreaming of Russia's economy will lend
stability to the Moscow Stock Exchange. Greater stability is also boosting
the prospects of Russian Eurobond and American Depository Receipt (ADR)
placements.
In 1992 Russia
suffered from annual inflation of 2,300 percent. Tight fiscal and monetary
policies have brought annual inflation to an estimated 22 percent in 1996,
with 10 percent expected annually for the next several years. Meanwhile,
the decline in Russian output appears to have hit bottom, with 1996's GDP
drop estimated at 5 percent. Although growth may not return until 1998,
Russia has the human and natural resources - a highly educated population
and a wealth of oil, gas, precious metal and timber reserves - to cause
a spectacular spurt.
Recognition of
Russia's stabilization successes in 1996 came in many forms. In October
Russia received its BB- long-term credit rating from Standard & Poor's,
with corresponding ratings from Moody's, Duff & Phelps and IBCA. These
positive ratings set the stage for Russia's debut Eurobond, which sold out
within hours of its November 21 launch, having raised $1 billion - more
than double expected sales.
Russia's successful
Eurobond placement has paved the way for additional offerings by regional
and city governments as well as large companies. Likewise, natural gas giant
Gazprom's October offering of ADRs representing 1 percent of its shares
quickly raised $429 million and eased the path of other companies. Inkombank,
one of Russia's largest commercial banks, will offer level-one ADRs representing
up to 3 percent of its shares in the first half of next year. Other successful
companies are certain to follow suit.
Who's in charge?
A year ago we
predicted that Boris Yeltsin will win a second term in office. Back then,
most "experts" didn't give him more than a 10 percent chance to
succeed. But succeed he did - by making billions of dollars worth of promises
he never meant to keep and by the magic of American PR.
When we predicted
his victory we also expressed concern about his health - and were right
on the money again. President Yeltsin disappeared immediately after the
elections, underwent heart surgery after months of preparations, and is
still in recovery.
Last fall it
became apparent that despite all assurances to the contrary he was no longer
in firm control, and that there was a power struggle going on in the Kremlin.
Reports from
Russia state that the president is making a steady recovery. But our own
sources in the Kremlin are saying otherwise: The surgery did not go quite
as well as the doctors expected. Yeltsin's vital organs do not work properly
without support systems.
That means that
he will take a more passive role and leave his handlers to do most of the
work. At present, the two people who control most government agencies and
policy are his logical successors, Prime Minister Victor Chernomyrdin and
Chief of Staff Anatoly Chubais.
Chernomyrdin
is loyal to Yeltsin's reformist agenda, and Chubais has impeccable market
credentials. Chubais, despite his lack of popular support, may - perhaps
through a close relationship with Yeltsin's daughter - have even more clout
than former Gazprom chief Chernomyrdin. These two reformers in the Kremlin
have close ties to the emerging Russian business elite.
They have recently
been joined by two more businessmen with considerable influence and matching
fortunes: Boris Berezovskii, appointed Security Council deputy, and former
Oneksimbank chief Vladimir Potanin, who is the new first deputy prime minister
in charge of economic policy.
These are not
the only players on the Russian political scene (just the most powerful).
Their opponents are the deputies in the communist-dominated Duma, Russia's
lower house of Parliament. The position of the two camps is such that the
communists only command two fifths of the votes, well short of the two-thirds
majority they need to overturn a presidential veto, and that leaves the
reformists more or less with their hands untied, as far as passing legislation
is concerned.
Tax paradise
The government
does not have the strength to carry out what it sets out to do. This was
driven home last fall when Moscow was unable to collect taxes.
Collection rates
were so abysmal that the IMF repeatedly cited them as a reason to delay
payments of loan tranches. Only 74 percent of budgeted revenues were collected
in the first nine months of 1996. Inefficiency and delinquency are built
into the Russian tax system, which, like so many other structures, was mostly
inherited from the Soviet period.
Enterprises and
individual citizens are accustomed to receiving support from the state,
but have also been conditioned to expect that non-payment of taxes and other
dues is acceptable and will be forgiven in the long run.
Despite the epidemic
tax delinquency, reformers are not powerless. President Yeltsin gave himself
sweeping powers under the 1993 Russian constitution. He would have succeeded,
had it not been for the powerful interest groups. These are the directors
of big enterprises and representatives of oil and gas companies to whom
even Prime Minister Chernomyrdin, nominally at the helm of the reform program,
is inclined to pay attention when they make a suggestion or air a complaint.
The light at the end of the tunnel
As we predicted,
1996 was not a very successful year for the Russian economy. A handful of
companies from the oil and gas and the energy sectors did extremely well,
attracting a lot of attention at home and on international markets.
But the bulk
of Russian industries are still in a deep depression. Early signs of stabilization
in GDP and industrial production in 1995 gave way to a slump in output in
1996.
All indications
show the decline will continue into 1997. During the first eight months
of the year the gross domestic product was down by 6 percent, compared to
a year earlier, though by last December it rose to minus one percent (overoptimistic
government forecasts for 2.5 percent growth had to be scaled down).
Moreover, prospects
for growth do not look so good either. The government is the first to admit
that tough times may remain the norm: a survey and a report by the government's
Center for Economic Trends conclude that in 1996 Russian industry entered
a new period of moderate decline as domestic demand continued to decrease
and manufacturers found out they had exhausted opportunities for increased
exports.
But there may
be a way out. The primary reason for stagnating growth is not falling demand
and public investment - but rather that private investment has not risen
sufficiently to compensate for this fall. In turn, low rates of private
investment stem from the overwhelmingly high interest rates prevalent in
the economy.
Yields on treasury
bills are still running at around 70 percent despite the slowdown in prices.
High yields make it more attractive for banks to invest for the short term
in government securities rather than in the real economy and productive
sectors. Therefore, the key for the government is to get these rates to
fall at least 30 percent annually in the current year. Can the government
do it? Finance Minister Alexander Livshits says Yes!
This, however,
is not a cure-all. In the long run, what Russia really needs is profound
structural change to achieve sustainable levels of growth in a market economy.
What the government must do is establish the appropriate macroeconomic and
infrastructural environment to promote these changes at the enterprise level.
Government policy should focus on stimulating private sector investment
and let enterprises start learning the market game.
Taipan's 1997 Forecast:
In 1997 political
stability will return to the Kremlin. That will have a positive effect on
the work of the government, headed by a reform-minded prime minister.
The government
will make a last-ditch effort to rein in the monopolies but its tax collection
efforts will yield mixed results.
The economy will
pick up, and a 2 percent positive GDP growth will be posted. Foreign investments
will increase. On the negative side, the economy will continue to be severely
distorted.
Social tension
will continue to run high, with strong popular discontent over eroding living
standards.