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. Last Updated: 07/27/2016

Clock Starts Ticking for New Reform Cabinet

The new cabinet now in place has the clearest mandate in five years to pursue urgently needed economic reform, but that is barely a start.


Analysts and the newly promoted ministers say the opposition to reforms will be tough and the new economic team has only until the end of this year to show real progress or forfeit the game.


The success of the new economic team, headed by first deputy prime ministers Boris Nemtsov and Anatoly Chubais, depends on progress in key


areas like reforming Russia's twisted tax system, breaking the power of so-called natural monopolies and cutting middle class subsidies on housing and pensions.


Each would mean a key step toward the "democratic capitalism" that Nemtsov says he hopes to achieve. Some would free up money for the government to start paying long-delayed wages and pensions, while others would create the environment needed for Russia to finally see economic growth.


Political interests, however, will make implementation difficult and could provoke bitter opposition. Chubais admitted on NTV television Tuesday that few politicians wanted to join the government because the decisions that needed to be made were so tough they would wreck political reputations. "They were afraid of losing face," he said.


"Most of these measures will negatively effect influential forces in this country," said Pavel Teplukhin, chief economist at the Troika Dialog brokerage.


Although the government has yet to announce a clear agenda, economists estimate the necessary reforms in most areas will require at least two years to complete and even longer to have a noticeable effect. But with a general strike called for March 27, public opinion is calling for quick fixes. And political resistance to change will only grow as parliamentary elections approach in 1999.


By the end of 1997, it should be clear whether progress is being made.


"It would be good to hear in the nearest future a clear program from the government," said Teplukhin. "It will show that the government understands the issues and is willing to do something. Then in a half-year's time, we can review the results. For the reforms to be completed, maybe two years is rather fast but feasible."


Reform of the chaotic tax system, analysts say, is probably the most important because it could remove a major damper on economic activity. A four-part tax code designed to streamline the system for 1998 is already largely prepared, but the State Duma could easily butcher it during debates.


"Since in the end the project has to pass through parliament, [the government] can't by their own decisions make that reform happen," said Alexander Morozov, an economist at the World Bank in Moscow.


Yet, tax reform is easy in comparison with some other reforms. While few in the Duma and on the streets can object to simplified taxes, other reforms could provoke storms of protest.


So-called natural monopolies in gas, electricity and transport subsidize low rates for individuals by overcharging commercial customers, a practice that has crippled some sectors of the economy. Effective reform would free up rates and introduce some competition by splitting off parts of the monopolies and deregulating them.


Nemtsov indicated he had plans to do just that. "I will do all I can so that atomic stations can sell their cheap energy to consumers directly without the middleman [of electricity monopoly United Energy Systems]", he told Interfax.


But change threatens bureaucrats in branch ministries, and the monopolies have some powerful friends in high posts. Prime Minister Viktor Chernomyrdin formerly headed the gas ministry, the predecessor of Gazprom.


Teplukhin offered the example of United Energy Systems, or UES. "UES is controlled by the ministry [of fuel and energy], and bureaucrats from the ministry feel that if UES is deregulated, they will be out of a job," he said.


Housing reform would allow the government to distribute subsidies much more effectively, supporting only the poorest layer of society. Under the present system, homeowners pay for communal services such as garbage collection and building plumbing according to the number of square meters they live in. Because the tariffs are artificially low, the richest people effectively receive the most subsidies.


Cutting the subsidies promises huge savings for the federal government, but the responsibility for implementing housing reform lies with regional leaders, who are not all prepared to bear the blame for hiking housing costs on a large portion of their voters. When subsidies were cut in St. Petersburg early this month, 20,000 people took to the streets in protest.


"It's a very painful undertaking," said Morozov. "Only the poorest gain."


The acquaintances Nemtsov made as governor of Nizhny Novgorod and as a member of the Federation Council may help consolidate support in the regions.


"His connections with the heads of the regions are probably instrumental for the government in trying to push reforms into the regions," said Yaroslav Lissovolik of the Russian-European Center for Economic Policy.


The government could also offend the banking lobby with its plans to cut them out of the lucrative process of distributing budget funds, replacing them with a government-owned transfer system.


Morozov said, however, that there is no guarantee the change will mean big savings for the budget. "Theoretically there is no contradiction between the existence of a treasury and the system of authorized banks," he said.