A quick overview of the Russian economy A free-for-all privatization process that was initiated in the Russian Federation immediately following the collapse of the Soviet Union in the early 1990s has left in its wake many overnight millionaires and millions in total privation.

But things are certainly looking good on the economic front in this country, as at least in Moscow prosperity seems to be oozing from the seams. Russia is a rich country from every angle. Its economic mainstay are oil, gas and metals. The income from the export of these resources pays for the enormously rich food and consumer durable needs of the 140 million Russians as the country today does not produce its food and its industry otherwise is still out of shape for many reasons. The Putin government has undertaken massive structural reforms in the last couple of years.

The Russian Duma affirmed a bill allowing the sale of the Russian farmland for the first time since 1917. Foreigners, however cannot buy this land, they can only acquire it on lease. Structural economic reforms have led to a sustained improvement in the investment climate in Russia. Still, because of the inefficient banking sector and a not-an-investment- friendly tax policy, investment, both domestic and foreign, has remained highly reluctant.

The industry is functioning, therefore, at a capacity of 51 per cent. A Russian businessman told Dawn that the country needed investment to grow at the rate of about 15 per cent annually while its present rate of growth is only a third of the desired target. Most of the private saving remains out of the banking sector because of the non-confidence of the people at large in the banks. And it is said to be due to this reason, among others, that as much as 30-50 billion dollars are flying out of the country annually. The businessman said that in order to stop this rot, the country needed a network of development banks to channel long term investment. Also, the investors need state guarantees to minimize the risks involved in investments. Besides, there is need, he said, to stimulate technical progress so as to give an impetus to investment in the country.

The businessman while explaining the sad situation in the banking sector said that the Russian banks had suffered thrice in the last 12 years. The first time they underwent a crisis was when there was hyperinflation in the country in the early 1990s. Next when the Russians played the market and indulged in the games of pyramids, there was a serious crisis in the sector. The third time was when the banks faced total financial collapse in 1998. It is because of these crises that today people are still treating all commercial banks with suspicion and they naturally do not keep their savings in the banks. As a result the banks are contributing only 4 per cent to the productive investments in the country.

Because of this there is a view in the country that foreign banks should be allowed to operate freely in Russia so that they could contribute to the investment activity. However, a more active involvement of foreign banks is considered to be non-conducive to the local financial sector. More active involvement of foreign banks might create an asymmetric situation in the financial market. The local business believes that the local banking sector could live with a 25 per cent share for the foreign banks in the local market. The good news is that in recent months as a result of the reforms being undertaken in the banking sector, the bank deposits are growing at the rate of 3-5 per cent.

The Russian businessmen believe that entry to WTO will grant Russia greater access to the market of the WTO member countries. But there is an apprehension that this will also open up significantly the Russian domestic market to foreign competition. Also, the demand of the European Union to raise prices for energy up to the world level is said to be absolutely unacceptable to the Russian Federation. Energy is a natural competitive advantage to Russia, which by the way is leveled by the fact that Russian climatic condition, are far from ideal.

The businessmen said that the objections that Russian prices of oil are lower than world prices should be balanced by considering the fact that Russian annual average temperature is lower than in most European countries. The matter could be understood clearly by the fact that each Russian is allowed to use as much gas as he needs at a price of 10 cents per month.

The second condition, which Russia has been asked to comply with for joining the WTO, pertains to various sector agreements that are not obligatory within WTO limits. For example, the agreements on aircraft equipment, on chemical goods and on state purchases are not obligatory under the WTO. Russian businessmen say that they cannot accept these agreements as they involve concrete and tangible damage to certain branches of Russian economy.

For instance the damage from an agreement regarding aircraft construction could be the equivalent to the destruction of the entire industry. It is also important to Russia to keep certain kinds of subsidies not only for rural economy but also for the modernization and structural reorganization of industry.

In Russia, the small and medium industry does not get any preferential treatment from the government or the banks because of which its performance has remained far from ideal and compared to small and medium size businesses and service industry, the productive industry in this category has continued to stagnate.

The taxation system in Russia is also undergoing reforms. Last year the system was simplified greatly and profit tax was reduced. Personal income tax is now very low and perhaps the lowest in Europe. The system of accounting and costs has also been modified to make it more responsive to investment. Companies can now claim cost for advertisements, insurance, credit and other expenses.

Tax burden on small businesses is expected to be reduced soon. After the reforms they will have to pay only one tax, and will not need to make complex calculations as required previously. The income tax will come down to approximately 6 to 8 per cent. Again, there are individual tax agreements between the tax services and some major corporations especially in the power industry which are related to the fact that these corporations often face delays and default in payment from customers. With these delays they just could not pay taxes on time and at the full rate. During the height of the financial crisis a norm was accepted in the law of the budget which provided companies with tax credits in order to get out of this situation. This tax backlog turned into a differed payment for several years. There is a long list of companies that have had personal agreement with the tax services to restructure their tax debts.

There is a plan also to raise the utility charges by 100 per cent. But the local businessmen said that this plan was bound to fail because the average population has a very low income. A huge portion of consumers physically cannot pay these increased utility charges, they said. Instead they believe that if proper technologies were used in the power sector and a conscious attempt is made to stop wastage, the cost of domestic consumption could be brought down three times and industrial cost by as much as 20 to 30 times.

Explaining the reasons for flight of capital these businessmen said that in the first place the taxation system had served as a disincentive for keeping the profits within the country and secondly the new owners of the most profitable export resources such as oil, gas and metal do not feel comfortable as they acquired their property during the privatization campaign and often many broke the laws of the land. Therefore, they see the risk that either their competitors or the state could open a case concerning illegal procurement of these companies.

Many reportedly milk their companies, like cows and extract all they can to take money abroad to a more secure location. As a result much less money is being invested in high yielding industries such as oil to support simple maintenance and replacement. This money goes abroad because the bosses of these companies are driven by short time motivation. Russian oil barons also do not want to cooperate with the OPEC; they want to grab profits today. In the middle 1990s some of the businessmen have made gigantic profits with the help of the ‘pyramids’ and left the market with more money than they had brought in. As a result the value of ruble fell steeply causing the banking system to collapse.