27.08.2001

COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT

The Duma (lower house of parliament) passed more than 150 federal laws in its spring session--including long-delayed reforms in areas such as corporate taxation, land reform, foreign exchange controls, and easing the burden of regulation on business. More ambitious initiatives are in the pipeline. However, the next batch of structural reforms will be much more difficult--both in terms of the ability to implement them effectively and the likely opposition from vested interests that will be encountered.

The second quarter saw a good deal of progress with respect to structural reform legislation. By the end of the year, the tax, land, labour, civil procedure and criminal procedure codes could all be on the statute books. Nevertheless, there is no letup in the pace of structural reforms, and the government is already promising a further raft of new initiatives. However, there are good reasons to believe that the pace of legislative change will slow in the second half of the year.

First, many, although by no means all, of the reforms passed this year were relatively "easy" in the sense that the main opposition to change came from clearly defined interest groups (small trade unions, foreign investors in the electricity sector, etc.) which could be either overcome or co-opted. The measures that remain on the government's agenda, such as pension reform or restructuring of the utilities, will affect a much broader spectrum of interests.

Second, the autumn parliamentary session is traditionally dominated by the debate about next year's budget. Although the government appears to be quite confident that it can avoid the fierce battles that have characterised the budget debate in recent years, the Duma's attention will still be taken up by the distribution of monies for next year and the concomitant lobbying activities.

Nevertheless, the government is already working on a host of new initiatives:

* The economics ministry has promised to prepare amendments to the bankruptcy law for submission to the Duma this autumn. These would provide greater protection to owners of distressed companies, in an effort to limit the scope for using bankruptcy procedures as a method of hostile take-over, and would also create specific procedures for reorganisation under bankruptcy, similar to the US chapter 11 process;

* A new law on currency regulation and control is to be introduced, although the text of this bill will be the subject of much wrangling;

* The government and the Russian Central Bank (RCB, the central bank) are to unveil joint proposals for banking reform by the end of September. Conflicting proposals have been submitted by the RCB and the Union of Industrialists and Entrepreneurs and the government still appears at a loss about what to do.

* The prime minister, Mikhail Kasyanov, in July approved a modified version of the controversial restructuring proposals for electricity monopoly United Energy System (UES). Minority shareholders, who worried about losing out in the process, have been promised reinforced government oversight. Nevertheless, opposition to the restructuring plan, which is backed by the economics ministry and UES, remains strong, not least from major regional energy companies, including Irkutskenergo, Tatenergo and Bashkirenergo.

* A proposal for the restructuring of Gazprom, the near monopoly in the gas sector, is due by December. Prospects for a thorough reform of the sector started to look brighter in May when Mr Putin replaced Gazprom's long-standing boss, Rem Vyakhirev, with a hand-picked ally from the energy ministry, Aleksei Miller. However, progress since then has been painfully slow, and the decision to freeze gas tariffs for the rest of the year indicates that the government will continue to use cheap gas supplies to subsidies industrial enterprises and households.

* The economics ministry has prepared the latest bill in its drive to de- bureaucratise economic activity, aimed at reducing the list of products that need certification and making the procedures for devising certification standards simpler and more transparent. At present, over 80% of the goods and services sold on retail markets in Russia are subject to mandatory certification, as against levels of around 5-7% in the EU and the US.

* The first pieces of pension reform legislation were passed by the Duma in a first reading in July but key measures remain bogged down in controversy. The government hopes to have the key legislation in place by the end of the year. The aim is to complement the unsustainable pay-as- you-go system with fully-funded individual pension accounts (financed out of a fixed share of employers' contributions). Disagreement persists about how and by whom the newly created pension funds should be managed.

While government and Duma are working together more efficiently than ever, the scale of the government's agenda makes implementation difficulties-- always a problem in Russia--an especially serious concern. The government is trying press ahead with a bewildering array of reforms all at the same time, stretching its intellectual resources and administrative expertise to the limit.

To take but one current example, the working plan approved by Mr Kasyanov for the first phase of electricity sector restructuring, which is to be completed by mid-2002, contains more than 25 sections and calls for the drafting and adoption of no fewer than five federal laws and 14 presidential or government decrees, plus numerous other directives, normative acts, methodological recommendations and reports. The danger here is not only of implementation failures at middle-to-lower levels of the state bureaucracy but of slips and errors arising from the over- burdening of a relatively small number of senior officials involved in structural reform policy-making.

The Land Code is another case in point: while its main provisions are now agreed and unlikely to change, it is expected that there will have to be substantial revisions ahead of its third reading simply in order to eliminate drafting errors that could, if uncorrected, have serious legal consequences. In short, the major downside risks associated with most areas of policy concern implementation.

SOURCE: The Economist Intelligence Unit (EIU) Viewswire

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