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Gaidar bullish on Russia's prospects

By MARTIN HUTCHINSON, UPI Business and Economics Editor

WASHINGTON, June 14 (UPI) -- Yegor Gaidar, former reformist Prime Minister of Russia (1991-92) believes that Russia is now a normal market economy, although reform can be expected to slow in the next two years, because of the electoral cycle.

Speaking Thursday at the Carnegie Endowment for International Peace, Gaidar, now a member of the Russian Duma and head of the Gaidar Institute, reiterated the optimism he had shown at a similar meeting in February 2001. Whereas three years ago Russia was politically controlled by the powerful business "oligarchs" this was now no longer the case; the oligarchs had either emigrated or made their peace with president Putin's government, and were concentrating on enlarging their powerful business interests. In foreign policy, Gaidar had seemed over-optimistic when he had claimed in February 2001 that Russia's relations with the U.S. would be like those with France -- cool, but with absolutely no danger of conflict. Today, Gaidar felt the position was even better than that analogy implied.

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However, Gaidar pointed out that there remained a number of risks to Russia's further development as a Western-style market economy

First, it is vain to hope that the speed of reform in the last two years will continue in the next two; with elections in 2003-4 the main battle will be to prevent reform from being reversed for populist reasons. Thus many Russian problems -- notably the banking sector, monopolies, municipal finance and military reform -- will not be solved in this political cycle, but must await another window of opportunity if one arises after the elections.

In this context both municipal finance and military reform will be very urgent after the next election; military reform to get rid of conscription, which is an effective tax on the poor, and municipal finance reform because the Russian regions have drained the municipalities within them of finance -- since the regional level is the least transparent level of Russian government, this inevitably leads to widespread corruption.

Second, Russia will remain an oil dependent economy, at least for the next decade. Therefore a very low oil price would be damaging, because it would adversely affect the national budget, while a very high oil price -- averaging above $25 barrel -- would also be damaging, because it would cause an excessive appreciation in the real value of the ruble, which would severely affect the non-oil economy. Russia's interest is for stable prices, in the $16 to $24 range, with increasing Russian market share; for different reasons, this is also the interest of the United States.

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Third, Gaidar fears an inflow of speculative short-term capital, which could produce another Russia bubble

. Here he would favor a Chilean-style restriction on portfolio investment inflows, under which they were trapped for twelve months.

Finally, Gaidar believes the banking system remains weak, and likely to produce further crises, although he pointed out that, since the system is very much smaller in relation to Gross Domestic Product than those in China and Japan, any crisis would be correspondingly smaller as well. Here the arrival of the new central bank governor Sergey Ignatiev is a hopeful sign; in the past, nothing was done because the banks themselves were controlled by interests with enormous political power.

On the foreign policy side, Gaidar stressed that Putin's foreign policy of engagement with the West on the basis of common mutual interests was highly unpopular domestically, both with the elites, who were still mostly brought up under the Cold War, and with the populace as a whole. Opponents portray Putin as another Gorbachev, giving everything away in the name of reform. Thus it would be politically impossible, for example, for Russia to cease constructing the reactor in Iran.

To Gaidar, it is difficult to see a domestic constituency for Putin's foreign policy, although he believes that, if it continues for several years, it will gradually be accepted as Russian prosperity increases.

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Gaidar believes that democracy is much less well established than the market economy in Russia, because the thought processes that produce democracy are not yet well ingrained. Nevertheless, he believes the downside risk to be, not a return to tyranny, but a "managed" democracy, in which the press is not free and the political process is nominally open but in practice controlled by the elite. Such a managed democracy would inevitably be very corrupt.

For the other countries of the old Soviet Union, Russia's improved position is wholly positive. No longer will anti-reformist forces in these countries be able to use Russia as a lever against the West, and against reform.

Nevertheless, Gaidar does not believe that even with stronger economies will these countries come together in a kind of Russian NAFTA, because their interests are too different. For example, Kazakhstan and Kyrgyzstan are both primary mineral producers, and hence would not welcome the high tariffs on automobiles that are necessary for Russia because of its large automobile industry. Gaidar felt the British Commonwealth, where the ties were primarily cultural and humanitarian, was a closer model than NAFTA.

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