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. Last Updated: 07/27/2016

Reforms: Stay Tuned for More

ReutersNew Central Bank head Sergei Ignatyev
The pace of structural reforms in Russia has accelerated considerably since President Vladimir Putin came to power in 2000. Driven by a young and energetic government, the number of approved laws and structural reforms has already reached a critical mass that would be impressive for any country.

But now the time has come for quantity to become quality, which means even more work must be done.

"There was significant progress on [approval of] structural reforms in Russia in 2001, with implementation of the bulk of them scheduled for 2002-03," ING Barings wrote in recent research on global emerging markets.

Indeed, the government still has much to do on the implementation front, and Russia still has a long way to go to catch up with major industrial countries in terms of living standards.

"It is clear that Russia has used this recent period of economic growth to put in place the groundwork for fundamental reforms," said Johannes Linn, World Bank vice president for Europe and Central Asia, during his April visit to Moscow. "However, implementation is more than passing laws; it requires that all parties have the incentives to move forward."

So far, major changes have been introduced to the tax system. The personal income tax rate has been cut to 13 percent, one of the lowest rates in the world, followed by a corporate profit tax cut from 35 percent to 24 percent, and the easing of taxation for small businesses. Not only have these measures significantly relieved the tax burden and stimulated investment growth mainly from domestic investors, they have also been credited with boosting collection rates by coaxing tax evaders out of the shadow economy.

In 2002, the government plans to further reform property taxation and replace the current property and land taxes with a real estate tax. The long-awaited reform of the banking sector is also scheduled for 2002. Hopes are high that the pace of change will accelerate under new Central Bank Chairman Sergei Ignatyev, who recently replaced Viktor Gerashchenko.

Other ambitious reforms scheduled for this year include the restructuring of natural monopolies Gazprom and Unified Energy Systems, which is intended to result in more market-determined prices and an end to the subsidization of noncompetitive industries.

Another major issue for 2002 is land reform. There is probably little on the political agenda that has a greater historical significance than the question of land ownership.

"That Putin has chosen the year before elections to liberalize ownership and trading of agricultural land indicates again the confidence of his administration," Roland Nash, head of research with Renaissance Capital, wrote in a recent research paper.

The potential benefits are expected to be enormous. According to Renaissance, the 6 percent of land currently held in private hands accounts for 40 percent of agricultural output.

Pension reform and the new bankruptcy law, as well as further steps to reduce currency controls and excessive bureaucratization of the economy, add to the list of government plans for this year.

The logical result of these efforts would be for Russia to join the World Trade Organization, which is expected sometime in the next 12 to 18 months. The WTO's final report on Russia's accession should be ready by September, which could facilitate Russian membership in 2003.

But to become a potent member of this powerful organization, Russia would have to bring its economic strength to a comparable level to that of major industrial countries. For that, the economy needs to grow more than 5 percent a year, which is more than the government is expecting. President Vladimir Putin criticized his Cabinet recently for not being ambitious enough.

The government has an optimistic and a pessimistic scenario for economic development up to 2005, with cumulative gross domestic product growth at 17.5 percent and 15 percent, respectively. "Neither of these [scenarios] guarantees even a reduction in the gap between Russia and the main industrial countries," Putin said.

Declining rates of growth (5.4 percent in 1999, 9 percent in 2000 and 5 percent expected in 2001) make analysts repeat that Russia's economic recovery over the last three years was the result of ruble devaluation, a high oil price and the economic and political stability engendered by the replacement of former President Boris Yeltsin by Putin.

"It is not yet the result of the Putin-sponsored reform program, which is still some way from the critical mass needed to ensure long-term growth," Nash wrote in a research paper on the progress of reforms. "As the oil price drains competitiveness out of the ruble, and before the Moscow-generated reform filters down through the multifarious layers of Russia's legendarily stone-headed bureaucracy, Russian recovery should not be considered assured," Nash added.