Investment Decrees 'a Sham'

The Russian government's upcoming package of economic decrees, intended to stimulate private investment in industry, represents at best a partial reform that will not likely have an impact on the country's investment climate, Western economists say.


The legislation, currently awaiting the signature of President Boris Yeltsin and announced last Friday by Economics Minister Alexander Shokhin, seeks to boost private investment in Russia by offering to lend 20 percent of the cost of long-term investment projects.


The legislation would alleviate some of the difficulties that private businesses have experienced in obtaining bank loans for periods longer than two or three months, Shokhin said.


But one Moscow-based Western economist, who asked not to be named, said the program was little more than government posturing.


"It's a kind of sham," said the economist. "The government has to prove it's not indifferent to this problem, and the" Prime Minister Viktor "Chernomyrdin government is good at showing that it cares about something and then not doing very much."


Another economist, Brigitte Granville, a senior fellow of the Royal Institute of International Affairs in Moscow, said she thought the decrees would be a small step forward, but that the government needed to introduce broader changes, such as reforming the tax system, to make the investment climate in Russia significantly more favorable.


"I'm not sure that it will change much. More would change by creating secure surroundings for investors," she said. "Reforms in taxes and other areas would be more likely to convince people to invest here. We need more general reform rather than piecemeal reform."


Political instability, high taxes and a lack of clear legislation in Russia have caused total investment to fall for the third year in succession, down 27 percent in the first six months of this year compared with the same period last year.


Yet the Economics Ministry estimates that some 30 trillion rubles ($14 billion), plus a further $20 billion in hard currency, is held in bank accounts or in securities by Russian companies and individuals.


The package of decrees would attempt to harness these financial resources by guaranteeing securities floated by government-backed investment projects.


The Western economist said it was unlikely, however, that the plan would attract private capital to industry in an economy where speculation on credit and currency markets is still much more profitable.


"In Russia, money goes to speculation, so there's not much interest in areas where they can't make a quick profit," he said. "What industry can yield returns of 10-15 percent per month?"


Granville, however, said that interest in industry has been growing among private investors as the Russian economy becomes increasingly stable.


A tight monetary policy has kept monthly inflation below 10 percent for the greater part of this year, and the political climate has calmed significantly since the beginning of the year, when the resignations of key reformers Yegor Gaidar and Boris Fyodorov sparked fears that the government would return to a command economy.


"More and more people are looking to make money on production," Granville said. "The situation here is less risky than before."


But the government's offer to put 20 percent toward investment projects was not likely to make a difference for private investors, the Western economist said.


Any project worthy enough to raise 80 percent of needed funds, he explained, should be able to reach 100 percent without needing the government's help.


"Investment and restructuring are taking place here already, and not with money from the government," he said.