Moreover, after several years of economic decline and chaos, there have been the first indications in recent months that the Russian economy is stabilising and, like the other transition economies of Eastern Europe, could soon start to grow again. The concern now is that the uncertainty posed by a leadership vacuum in Moscow will interrupt the progress being made, and delay the return of investment capital which had been fleeing the former USSR during the dramatic downturn.
All the evidence suggests that the Russian economy, which had its worst year in 1992 when inflation peaked at 2,500 per cent, has now stabilised. This year should see the inflation rate down to around 100 per cent and it is projected to fall to 12.3 per cent in 1996. Even more encouraging after a calamitous fall in output since stabilisation began - gross domestic product dropped 48.3 per cent in the period 1989-94 (according to new IMF data) - growth is projected to resume next year at a healthy rate of 4.5 per cent. Indeed, prosp- ects across the whole former Soviet Union region and East- ern Europe for 1996 look brighter than at any time since the Berlin Wall - the symbol of the Cold War - was dismantled, with growth across the region forecast at 3.5 per cent. After many false dawns those businesses which showed a commitment to the countries in transition will see a healthy payback.
When a senior Russian team of financial officials met with their bankers from the Group of Seven richest industrial nations in Washington in October, there was a very different reception than in previous years. The G7 team praised the reform efforts undertaken, particularly in bringing down inflation and stabilising the rouble, and promised further help to finance reform and restore growth. In fact even as President Yeltsin fell ill, a team from the International Monetary Fund was opening talks in Moscow about the biggest assistance package from the west so far.
Under negotiation are two types of assistance. Firstly, there is a special $6 billion fund, raised by western countries and Saudi Arabia, to help keep the rouble in a stable trading band on the foreign exchange markets. Such a fund would act as a barrier against inflation, in that it would support the current US dollar-rouble parity.
The second package of IMF loans (Russia already has received some $6 billion under earlier reform facilities) would be around $9 billion to be used to support the Russian budget, any balance of payments difficulties and further sectoral reforms of the Russian economy ranging from privatisation to banking and tax collection. It is in these vital areas of the financial system that economic reform efforts should be concentrated once inflation and output decline has been stabilised. In addition the World Bank, through new president James Wolfensohn, has been negotiating further energy loans for Russia (it has already supplied funds for refurbishing the oil industry), including a $500 million line of credit to help reform the coal sector.
The great drive to turn Russia into a western style economy, spearheaded by Boris Yeltsin and other reformers, has made substantial progress. New data collated by the European Bank for Reconstruction & Develop- ment suggests that at the end of 1994 some 62 per cent of gross domestic product had been taken out of the state sector, as had 51 per cent of the country's workforce. In fact among the larger enterprises, employing most of the industrial workforce, some 80 per cent of companies have been privatised in some way.
The next wave of privatisations will include what are known as strategic enterprises, such as the defence and aerospace companies, and large scale energy firms which until now have been ring-fenced. However, as has been the case in some western democracies, the Russian federation intends to keep a strategic stake in these enterprises for two to three years - a kind of golden share.
The free market approach in Russia has been reflected in a series of other reforms. At the end of 1992, some 80 per cent of wholesale prices and 90 per cent of retail prices were decontrolled. Now only basic necessities such as medicine and certain foods are subject to federal price controls. Steps are also being taken to open Russia to more trade, although tariffs were raised earlier this year to slow the influx of imported consumer goods. A new banking law is also due to come in by year end.
Despite all the promise, the pioneers in the aviation field who sought to do business in Russia before the economy stabilised have had little success. A series of western carriers, including Austrian airlines, Cyprus Airways, Delta Air Lines and Lufthansa, have made code sharing and other marketing arrangements with Aeroflot since 1989. However, bids by companies such as British Airways to establish joint venture airlines in Russia have failed because of the economic chaos, corruption and sluggishness of business.
Ahead of the Yeltsin illness there was every sign that the business and investment climate was beginning to change. The most important financial signal will come when the $42 billion of capital which left Russia in the period 1992-94, begins to return because of renewed faith in the country's politics, banking and growth prospects. But that may now be delayed until electoral and leadership uncertainties are resolved.
Alex Brummer
Source: Airline Business
