The pace of reforms critical to Russia's economic renewal has dragged over the past year, including the breakup of the state-controlled electricity and gas monopolies, the International Monetary Fund said today.
Concluding an annual two-week visit and review, economists from the fund called for Russia to revive the reform program and lessen dependence on the sale of oil, the country's largest export. High oil prices have helped fuel four years of rapid economic growth in Russia and three years of government budget surpluses.
Many economists say President Vladimir Putin has made an impressive start on economic reforms in the first half of his term. But the pace slackened in the past year as the government tried to address more challenging changes, causing powerful interests to organize against it. The process could be even harder this year with parliamentary elections just 10 months away and politicians reluctant to make tough choices.
"The easiest stuff was done early, almost with the stroke of a pen, like tax legislation," said Christof Ruehl, chief economist at the World Bank's Moscow office. "Now you are talking reforms that are endlessly more complicated and really affect vested interest groups."
The much-delayed breakup of Russia's vast electricity monopoly, United Energy Systems, is a case in point. The government contends that the company must be split up and sold if the country's aging power plants are to be kept running and ultimately modernized.
The proposal, backed by Putin, has been in the works since 2000 and is scheduled for the key second vote Friday before the lower house of the Russian parliament. It will take three votes, the approval of the upper house and a presidential signature for the measure to become law.
It is opposed both by progressive and communist lawmakers, who say the deal will benefit powerful Kremlin insiders and cause consumers' electric bills to rise. Some regional governors are lobbying against it because their control over the sprawling system would be weakened, economists say.
In addition, the government has yet to produce a plan to overhaul Gazprom, the state-controlled gas monopoly, or to overhaul the banking, housing and civil service sectors.
Such changes are all the more necessary now, the IMF contends, because Russia's recent economic growth has slowed. After expanding at a remarkable 8.3 percent in 2000, Russia's economy is now growing at only 3.5 percent, despite continued high oil prices.
Still, many economists say, Russia is reaping some of the benefits of three years of stable, reform-minded leadership and a better business climate. On Tuesday, BP, the world's third-largest oil company, tentatively agreed to pay $6.75 billion in cash and shares to become half-owner of a new Russian oil company.
It would be the largest single foreign investment in post-Soviet Russia, equal to a quarter of all foreign direct investment since 1992. And while economists say it doesn't necessarily signal a coming wave of foreign investment, they call it a show of confidence by a major international company that could encourage others.
"It's a good sign, a very good sign," said Evgeny Gavrilenkov, chief economist of Troika Dialog, an investment firm in Moscow. "But it's just one step."
BP knows well the travails of doing business in Russia. After it purchased a 10 percent stake in the Siberian oil firm Sidanko in 1997, it accused Russian businessmen of stripping the firm of its assets. BP eventually won management control of Sidanko, but only after its initial investment dropped in value.
"We had it tough at first," BP's chief executive, John Browne, said in a statement. But he said, "Russia's greatly improved economic stability, improved legal system and increasing commitment to the international rules of trade and business" gave BP confidence in the new deal.
The joint venture firm, as yet unnamed, intends to produce 1.2 million barrels a day and will control oil deposits estimated at between 5 billion and 9.5 billion barrels. That will make it Russia's third biggest oil company, behind Lukoil and Yukos. BP will own the company jointly with Alfa Group and Access/Renova, two Russian industrial conglomerates.