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. Last Updated: 07/27/2016

Gaidar Sees End to Post-Socialist Depression

VedomostiGaidar brought the team of so-called young reformers into the Yeltsin government.
Boris Yeltsin announced the establishment of the first post-Soviet government 10 years ago. He himself became the prime minister and Gennady Burbulis his senior deputy. All the same, the reforms are remembered as Gaidar's reforms.

Yegor Gaidar was just one of two deputy prime ministers in that Cabinet, but it was Gaidar who brought the team of young economists into the government -- Anatoly Chubais, Alexander Shokhin, Sergei Glaziev, Pyotr Aven and Andrei Vavilov.

Gaidar was the driving force behind the first year of radical reforms in Russia.

Q: What has happened to Russia in the last 10 years?
A: It has changed radically. We didn't have then what we've got now. Russia is a state with borders, customs, banks, money, a tax system and an army. All these institutions are not perfect, of course, but they're functioning.

It's been a difficult road, but we've made it through.

Q: Experts say economic growth over the last two years must be viewed with an earlier drop in gross domestic product of 50 percent and with the unusually favorable situation on the world markets in mind. Are these the main reasons for the growth?
A: I think this a superficial explanation. Economic growth is indeed taking place against a background of high oil prices. At the same time, other countries in the Commonwealth of Independent States, those that do not have the sort of resources Russia has, are showing economic growth as well.

The fundamental reason for the growth is, in fact, fairly simple. Former Soviet republics have left the post-socialist depression behind.

Of course, high oil prices have played a role in our economic growth; so have successful moves by the government. But the major reason is as I've described it -- the period of recession across post-Soviet territory is mostly over.

Q: Which economic model would you say the government has chosen to follow -- one emphasizing exports of natural resources or one that sees the industries that bring in hard currency sponsoring promising sectors?
A: To tell the truth, I do not trust the effectiveness of "scientifically" redistributing funds from the natural resources sector into attractive and promising projects.

Our bureaucratic apparatus is not what I'd call entirely adequate. Give it a simple task -- like the collection of a uniform income tax -- and it may succeed. If, however, we entrust officials with selecting projects, I don't think the most promising projects will be selected for investment. This is a sure road to embezzlement and the distortion of the advanced technology market.

This is a serious market where real muscles are needed to survive. If someone got his money through inroads into the bureaucratic apparatus, that will not make him competitive on the international market.

The best thing the government can do is to create conditions for the independent development of high-tech enterprises and companies.

This is the only way, incidentally, to gradually lower the natural resources sector's share of the nation's exports and GDP.

Q: The government's policy fortifies Russian manufacturers' competitive capacities but keeps industry backward at the same time.
A: The choice between the policies of a strong and weak ruble is a strategic one. The weak-ruble policy eases growth but does not encourage enterprises to upgrade their technology.

A lengthy period of high oil prices is the worst danger here.

Remember the 1970s, when the Soviet Union got an unexpected windfall? The price of oil then was the equivalent of $70 per barrel today. For some reason, the Soviet elite decided this situation was going to last forever. All planning for import-export structures, the military-industrial complex and the agricultural-industrial complex was geared to those unbelievable price levels. And when the oil market crashed to $20 a barrel, the Soviet economy was unable to adapt.

Fortunately, this danger is not as serious now as it was six months ago. If the price of oil remains at the level of $18 per barrel, the risk to the economy will be even smaller.

Q: Forty percent of investments are made in the fuel and energy sector and the transport sector. Oil companies say: Stop putting us under tax pressure, and we will invest more in our own development and the development of adjacent sectors. How convincing is this?
A: Of course, 40 percent is too much. But that is inevitable.

In my view, oil prices exceeding the 10-year average pose a serious threat to Russia. Colossal financial resources have been concentrated into natural resources. That's one of the elements of the risk.

Take a look at the books of Yukos, Surgutneftegaz and other companies and you'll see serious investment in refining, higher effectiveness of extraction and cost-cutting measures.

I agree that all these spheres do indeed need investment. All the same, dividends are so huge that oil companies are investing in what they consider promising sectors.

Conglomerates appear; the economy being formed resembles the [South] Korean model. It may have high growth rates, but it's vulnerable.

Q: The ability of the powers-that-be to activate consumer demand is fairly restricted. The meager increase in the income of the population jeopardizes the modest rates of economic growth of 4 percent to 4.7 percent a year.
A: We should be calculating real income better than we've been doing.

Real salaries have been growing fast; they've increased 22 percent since September of last year. To a certain extent, of course, we have the tax reform to thank for that. Anyway, as income goes up, it drags consumer demand with it. ... To tell the truth, I'm somewhat apprehensive of the rates of real salary growth and, therefore, those of the consumer demand growth.

We should not labor under delusions; high oil prices have played their role here.

Q: Despite manipulating money supply both this year and last, the government and the Central Bank have managed to avoid accelerated inflation and slow economic growth. Does the government have more delicate instruments?
A: The government and the Central Bank have been doing fine. But there have been some lapses.

Unwarranted weakening of the budget policy in late 2000 resulted in a wave of inflation. It lasted through the first quarter of 2001.

This was the price the government had to pay for succumbing to political pressure and cutting budget reserves.

Q: It seems the lesson has been learned. The government is now doing what it can to restrict its expenditures.
A: Well, it is not going to make the same mistake again.

Generally speaking, the composition of the government's monetary-credit and budget policies look convincing to me.

Q: In the next three years, Russia will have to pay almost $45 billion on its foreign debts. We cannot expect miracles here. The economy will not survive it. Modernization and dynamic growth are impossible, as the crises in Argentina and Turkey confirm.
A: The situation in Russia is radically different.

I even think that how we serviced and paid our debts these last two years has had a positive effect on economy. Had the government established a stabilization fund, it would have automatically received a part of oil revenues. We don't have this instrument in Russia, however, and the government merely paid the debts.

In 2002, Russia will have to pay approximately as much as it paid in 2001. This is something we can afford, something we will survive.

On the other hand, nobody knows what oil prices will be. If they go below $18 a barrel, that would generate additional difficulties.

However, the problem of debts to the Paris Club and their restructuring would look different. It is one thing to discuss restructuring when oil costs $25 a barrel; it is another when the price drops by 50 percent.

As long as we're not asking for the debts to be written off, I don't think there would be a problem with a postponement.