Two recent conferences on Russia examined the status of Moscow’s reforms under Putin and the prospect for economic and technology opportunities in the nation.
One event, held in Moscow, was sponsored by CATO, and another on trade, investment and diplomacy was hosted by the World Russia Forum and Paul Weyrich’s Free Congress Foundation in Washington.
At Moscow’s CATO meeting, co-sponsored by the Russian Union of Industrialists and Entrepreneurs, the leading participants met privately with President Vladimir Putin and his economic counselor, Andre Illarionov, for over four and a half hours. They included CATO President Ed Crane and many of the renowned international economic development experts who spoke at the conference. Social Security privatizer Chile’s Jose Pinera and University of Chicago supply-sider professor Arnold Harberger, who once was a key economic adviser to Chile’s Pinochet, both told indicated Putin was “really interested in free-market ideas and how to apply them.” They said the group was very impressed with Putin’s range of knowledge and intellectual curiosity.
Several speakers pointed out that the high world price for oil and gas was a major reason Russia is prospering, and visitors were impressed with Moscow, its traffic and construction boom, including vast new suburbs. Easy oil money, however, allows the government to avoid difficult economic reforms that would make the economy grow even faster – for example, facilitating foreign investment like China does.
Russians are unhappy about NATO expansion and plans to have F-16 fighters flying border patrols in the Baltic nations, just minutes from St. Petersburg. Also, Evgueni Volk, Heritage Foundation’s representative in Moscow, explained how visas to visit Europe have now become very difficult for Russians to obtain. The Moscow Times wrote: “A new ‘iron curtain’ is descending along the new borders with Russia and Ukraine, this time hi-tech and financed by West Europe, to keep out illegal immigrants.”
Corruption was widely recognized (including by Putin) as a major problem in the bureaucracy and the courts, which afflict business and hold Russia back.
There are gradual improvements, however. The World Bank’s Richard Messic presented a paper on how to reform court systems, explaining experiences from other nations and arguing that reform of the courts cannot come from judges and insiders, but must rather be imposed from outside.
Medium-sized Russian companies are most damaged by corruption. Small entrepreneurs could handle bribes efficiently, and large companies’ executives were shielded and harder to be shaken down. They could hire lawyers and make their voices heard to top government officials. Many Russians find it safer to invest through foreign companies that they set up outside Russia. An estimated 70 percent of all Russian assets are held in name of foreign shell corporations.
Trade and investment
The second conference, in Washington, covered more nuts and bolts issues of trade, technology transfer and Russian-American relations.. Its speakers included many congressmen and high-level investors, engineers and government officials.
Victor Alessi of the United States Industry Coalition for the Commercialization of Technology spoke of 130 projects and important Russian breakthroughs. One, for civil defense, was a new way to analyze lethal biological agents within minutes instead of the current U.S. way of culturing, which can take days. Others included a very sophisticated radar to detect tunnels, oil, gas and coal reserves. Small, cheap explosive vapor detectors, targeted radiation for medicine and high-speed injections for massive inoculations were other discoveries he mentioned.
Boeing’s director of international relations, Paul McNeill, spoke glowingly of the company’s joint ventures with Russian engineers, saying, “The advanced education of Russian engineers and scientists is superb.” He said the new Boeing plane was counting on key engineering from its Russian operation. He spoke of other joint ventures with the Space Platform (launched from Russia), in alloys, 3D imaging and more.
Susan Eisenhower remarked on “Russia’s steady progress” since the currency crash of 1998 and how many Americans were still stuck with pre-’98 thinking about Russia. She expressed concern for the suspended programs in cooperative threat reduction for cleaning up nuke material.
Said Eisenhower, “We must break out of still fighting the Cold War and work with Russia on the anti-terror war.”
Nikolai Zlobin of the Center for Defense Information said it was “not easy to foster Russian-American cooperation” and that “there were few forums for discussion and debate.” He praised the Harvard meetings, which yearly bring together top Russian and American generals. He said the risk of “accidental launch of nuclear missiles” was very serious and that nuclear war could still happen, adding there was no verification method over storage of warheads. Also, he pointed out that the NATO expansion had deprived Russian weapons manufacturers of a major market in Eastern Europe.
Igor Panarin of Russia’s Ministry of Foreign Affairs said economic growth would reach nearly 12 percent for the first quarter of ’04. He said 58 percent of Russians now see NATO is a current threat and urged the U.S. and Russia to find common grounds for working together. Panarin complained of the F-16s the U.S. is virtually giving away to nations bordering Russia.
Arcadi Murachev, who used to work with Paul Weyrich’s Krieble programs in Russia, pointed out some of Putin’s successes. These included newfound prosperity for millions, price stability, final defeat of the Communist Party (its vote in the Duma (Parliament) has dropped from 260 seats in ’95 to 58 in ’03), tax reform (a flat 13 percent tax), the recent cut in social security/medical insurance taxes from 34 to 26 percent and growing reform in the court and justice system.
Thomas Graham, director for Russia at the National Security Council, gave the luncheon address. He said there was nothing to indicate that Russian-American relations were worse, but also said that there were few constituencies working in both nations to foster understanding and good relations, such as existed with Germany, for example. He said it was critical for Russians to visit the U.S. to building relations and asked for patience with the long delays in granting visas for Russian visitors.
Former U.S. Ambassador to Russia James Collins also spoke at the conference. Trevor Gunn of the U.S. Dept. of Commerce remarked upon how new technology would soon bring cheap and easy voice and high-speed Internet to all of Russia. Internet penetration now only reaches 5 percent of the population outside of Moscow. He said there was not much U.S. investment going into Russia. Another speaker countered that Toyota is now planning large investments in Russia.
German banker Peter Kolle of the HVB Group stated that more foreign investors are now coming in, that too much depends upon Putin himself, but that the legal system was getting much better. Kolle reported foreigners were winning cases in the courts and that legal problems were in the execution and enforcement of judicial decisions. He also emphasized it was very tough for medium-sized companies in Russia because of hundreds of licenses and rules.
Marlena Hurley with Delta Capital said consumer products was the most profitable and successful arena for foreign investors, rather than technology. Her company was finding leasing its most profitable venture. Roberta Brzesinski with Emerging Markets Partnership explained how there were not credit-history records for many individuals and companies and that credit was expanding greatly. Her company deals with transportation and construction industries. New construction has been tremendous, she reported.
Paul Weyrich, who had led over 30 democracy educational trips to Russia with the late Robert Krieble, stated Russia’s President Putin was about as good a leader as the Russian system could get, emphasizing that every nation had to work out its own way of governing. He argued the U.S. should not be confrontational in telling Russians what to do, but rather should offer the experiences of other nations as advice through diplomatic channels. He was very impressed with Russia’s evolution since 1998.
Several East European nations and Russia are progressing on privatizing their social security along lines of the Chilean model. These nations don’t have the economy-busting funding commitments to their citizens like Western European nations have. Slovakia has become the freest economy in Europe, along with Ireland, and its tax cuts (19 percent flat individual and corporate income tax, no dividend or inheritance tax, 19 percent value added tax) are pushing other European nations, e.g. Austria, to lower their tax rates, too. Eastern Europeans who want free markets are unhappy with the European Union model, which is very expensive and statist with masses of costly regulations and rules new members must follow.
Economists (including at an important conference of the Mt. Pelerin Society in Hamburg) agreed that the “rule of law” is more important than democracy in achieving economic development. Several admitted neglecting its importance by making suggestions in terms of their own experiences and nations where the rule of law was taken for granted. In most developing nations it did not exist.
Jon Utley is a fellow with the Ludwig von Mises Institute and co-ordinates the Atlas Foundation’s Russian Think Tank programs. He was a former foreign correspondent for Knight Ridder in South America and has written widely on development economics, including for the Harvard Business Review.
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