Russia's Foundation for Western Business

By Alhadeff, David V. | Russian Life, Summer 1994 | Go to article overview

Russia's Foundation for Western Business


Alhadeff, David V., Russian Life


The political dogfighting and economic free fall that most people associate with post-Soviet Russia is rapidly abating. Is this disappearing act a brief illusion or a new reality? While those accustomed to Russia's past behavior will doubt prospects for serious improvement, a new reality is emerging that is too important to ignore. For Western business, this is welcome news.

It is said that only Richard Nixon could have opened up China and that only Ronald Reagan could have ended the Cold War. Perhaps Prime Minister Victor Chernomyrdin, the industrialist who once ran Russia's gas monopoly, is the only one who can enforce radical reform measures that the reformers themselves could not. Inflation is down, subsidized credits are increasingly rare, and consumer demand and real incomes have risen for the first time since the collapse of the Soviet Union.

After nineteen months in office, Chernomyrdin has emerged as Russia's second most powerful man and a leading proponent of reform. "Russia is a new place," the prime minister told a meeting of the government's Consultative Council on Foreign Investment. And, with new proposals for foreign investment, crime fighting, and increasing political and economic integration with the West, it's easy to see why. Prospects for foreign investment continue to improve. A package of draft laws recently announced include a five-year income tax holiday for foreign companies; an end to restrictions on capital moving in and out of the country; the right to retain all hard-currency earnings from exports; abolition of import taxes on materials used in production; and a three-year exemption from any changes in tax legislation, seven years if the foreign holding is above $100,000. These new laws, which must meet parliamentary approval, indicate Chernomyrdin's commitment to increase and protect foreign investment. The practical need for foreign investment in Russia has finally gained the political backing required to create a workable business environment.

Those concerned about building a stable business environment in a country with production falling at 25 percent a year should ponder two issues. First, consider the enterprises in decline. Monolithic, antiquated, and losing enterprises producing worthless products are a drag on the state's budget. Second, consider the statistical system. The basis for determining Russia's output figures is revenues from the very enterprises in decline. The newly privatized firms and the service industry, which now exceed 50 percent of gross domestic product (GDP) hardly fit into this outdated system. In fact, the statistics committee only recently appointed monitors for the emerging private sector. According to the Financial Times, 40 percent of the economy may not be taxed at all, and the GDP may be underrecorded by up to 15 percent.

Chernomyrdin has finally given Western businesses the necessary tools and assurances to help restart Russia's stalled economic engine. …

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