Russia: Economic Overview
Russia still suffers frequent near-crises as the government continues its adaptation to Western economic standards.The questionable health of President Boris Yeltsin, reelected in June 1996, has added to the power struggles between conservative and more liberal forces in the country. Nonetheless, Russia remains one of the potentially most attractive countries in the emerging markets, given its population, broad industrial base, and extensive natural resources.
The Yeltsin administration and the central bank in February 1996 announced a three-year economic stabilization program that is extending the tight fiscal policy, restrictive monetary policy, and trade and energy sector liberalization initiatives begun in 1995. This program formed the basis for a three-year, $10.2 billion facility from the International Monetary Fund.
Because of poor revenue-raising performance by the government in 1996, domestic and foreign borrowing increased. Now the pressure is on the state privatization agency to help bridge the fiscal gap.The decision in November to merge Russia's two main telecommunications companies has helped assure potential investors of the stability and relative risks of the sector.
FOREIGN INVESTMENT CLIMATE
Although there are no significant legal barriers to doing business in Russia, the absence of sufficiently developed civil, commercial, and criminal codes is a major constraint. In addition, high and unstable taxation, rise in violent crime, capital flight, and a lag in the development of local long-term capital sources are problems for foreign and Russian business.
Foreign investment regulations regarding permissible activities, as well as prior authorization and notification requirements, are confusing and contradictory. The Ministry of Finance, local authorities, and various central government bodies all register foreign investments.
Prior approval is required for investment in new enterprises using assets of existing Russian enterprises; foreign investment in defense industries (which may be prohibited in some cases); investment in the exploitation of natural resources; all investments of more than 50 million rubles; investment ventures in which foreign ownership exceeds 50%; and investment to take over incomplete housing and construction projects.Additional registration requirements exist for investments exceeding 100 million rubles.
Projects of foreign enterprises may also be subject to expert examination for ecological considerations or if they involve large-scale construction or modernization.
Despite the apparent pitfalls to foreign investment, Russia has made great strides in its privatization effort. According to the government, almost 120,000 enter prises have been sold, in whole or in part, in smallscale, voucher, and cash privatizations.This represents 75% of manufacturing enterprises and 85% of manufacturing production. More than 80% of Russia's industrial workers now work in privatized or quasi-privatized companies. The federal government's portion of the cash privatization program, under which it is selling retained holdings in privatized companies as well as enterprises not yet been privatized, began in late 1995 after substantial delays. The controversial loans-for-shares portion of the program was under review in 1996.
In April 1996 the Paris Club of official creditors agreed to reschedule Russia's outstanding debt of more than $40 billion, including debt inherited from the Soviet Union, for a term of 25 years. The agreement is subject to periodic reviews tied to performance under an IMF program. In May 1996 the London Club of commercial bank creditors reached an agreement in principle with the Russian government to reschedule $32.5 billion in debt. The deal calls for principal to be repaid over 25 years, with a seven-year grace period.
Following the collapse of the Soviet Union, the division of state-owned banks led to the creation of more than 2,500 banks in Russia before insolvencies reduced the number to about 2,300 in January 1996. …