Russian Crisis: Western economists optimistic

(First Edition)

HAS the economic tide begun to turn? President Boris Yeltsin's victory over hardline Communist sympathisers on the streets of Moscow has certainly lifted the confidence of Western experts.

Reforms, they think, will now begin in earnest. Foreign business interest is expected to swell. The obstacles remain immense, but privately even Group of Seven officials are guardedly hopeful.

'Basically I'm very optimistic,' said Professor Anders Aslund of the Stockholm School of Economics and an economic adviser to the Russian government. 'The budget deficit will be curbed, liberalisation of the economy will speed up and monetary policy will be tightened.

'The parliamentary elections are a pre-condition. But in the first three months of 1994 I think we will see a true liberalisation of the Russian economy.'

Western experts believe the elections will provide an opportunity for the people to vote against inflation - now running at close to 20 per cent a month - and the widespread system of subsidies, which are a principal cause of Russia's economic problems.

A successful outcome to the election should also enable the International Monetary Fund to advance the remaining dollars 1.5bn (pounds 1bn) in loans tied to the promise of reforms. Much larger sums are likely if reforms are carried out.

What the IMF and G7 want to see is real progress in tackling the budget deficit, now equivalent to 10-20 per cent of national output. They also insist on an effective monetary policy, in other words interest rates high enough to choke off the runaway growth of the money supply. Parliament has blocked every attempt by President Yeltsin to implement these reforms. This week's events, therefore, help to explain Western optimism.

An IMF approved reform programme usually acts as an imprimatur for Western bankers and investors. Eventually economic change can act as a magnet for capital flight too, providing a massive new source of investment.

Russian capital flight was once the pilfering of state coffers by the Communist Party. Today it is chiefly the proceeds from illegal exports to the West which remain in Western bank accounts. The impact of luring this back could be significant. It has been estimated that only dollars 1bn to dollars 2bn of private Western money has actually been invested in Russia since August 1991, even though as much as dollars 20bn has been 'committed' on paper.

Whatever the zeal of Mr Yeltsin's reformers, Yegor Gaidar and Boris Feodorov, they have problems to overcome, including the growing autonomy of Russia's regions which leads to foreign business confusion over who to do business with. A deal signed in Moscow may, for example, carry little weight elsewhere.

Another potential problem is the growing political power of the army, which implies that prospects for defence cuts must diminish. Nor is the army's revived status any guarantee that Russia will remain the West's friend. Recent events in Georgia suggest the army would prefer policy geared to re-asserting Moscow's authority over the former-Soviet republics.

But even if that points to waning Western enthusiasm for G7 aid to Moscow in the long run, some investment bankers believe that, as in the case of China, this is unlikely to halt the deepening ties between Western business and Russian capitalists. 'Who says a reforming bear will be friendlier?' said David Roche, Russian expert for Morgan Stanley, the US investment bank. 'But the interest of Western business just goes on. Most businessmen believe that whatever happens at the top will not affect the historical outcome.'