Major Achievements in Joint Research by EPA and Ministry of Economics of the Russian Federation in 1998

2nd March, 1999

With this report on Russia's economic reform, we acknowledge the successful completion of the joint research project by the officials of the Ministry of Economics (MOE) of the Russian Federation and by the Economic Planning Agency (EPA) of Japanese government in FY1998. This project investigates three themes: the macroeconomic situation of Russia including its future prospects, improving and utilizing economic indicators of Russia, and how to charge public utilities bills for realizing efficient allocation of resources in Russia. These themes were initiated by the Record of Discussions on 2 March, 1998, at the end of the 12th Economic Policy Dialogue (a high-level biannual meeting between the MOE and the EPA). The authors of the papers in this report listed in the attachment have enriched their messages through the frequent exchange of views between the MOE and the EPA. Such discussions form the Economic Policy Dialogue, along with meetings between Japanese economists from both inside and outside the EPA, when three MOE economists were invited to Japan for this project. As a result of those spirited discussions, a consensus was reached on the following points: 1 The Russian economy was struck by the currency/financial crisis in the summer of 1998 and turned to negative growth again, with the sharp decline of the ruble and a hike in the inflation rate. The major causes of the crisis are: the huge government deficit, the country's fragile financial system, and the decline in the price of oil an important export productin the international market. The worsening economic situation in Asia also exaggerated the crisis. 2 The following factors also contributed to the crisis. First, charges on public utilities are not paid based on the amount of consumption, and the level of charges are kept low compared with the cost, and thus oppressed the government financial situation. Second, a lack of sufficient economic and financial statistics also augmented anxiety among investors. The Russian government has already taken steps toward solving these problems. It is important that this effort be promoted unceasingly. 3 From now on, it is important for the government to secure the emerging but weak trends of stabilization of production activity while preventing a rise of inflation, and creating a foundation for economic growth. To achieve this end, the following measures are necessary. The first is the restoration of tax revenue and the rationalization of government expenditure to reduce the fiscal deficit. The second is the early settlement of negotiation with creditor countries and institutions, which will restore the credibility to attract overseas investors. Third is the creation of a financial system that links savings with real investment. 4 Preparation to establish the Russian Development Bank is now proceeding. The Russian Development Bank is expected to create a flow of funds from savings to real investment. The smooth flow of funds has been impeded up to now, and thus the creation of the Bank contributes to the expansion of real investment that is necessary to achieve economic growth. It will also contribute to settle the barter transaction problem that underlies the financial/currency crisis. It is thus timely to study what roles the Russian Development Bank should perform in next year's joint research.

Andrei G. Shapovalyanz Minister of Economics Russian Federation
Taichi Sakaiya Minister for Economic Planning Japan

Appendix: Themes of joint research project in FY1998 and authors of papers
Macroeconomic Situation of Russia, Including Its Future Prospects
Russia: Mr. Alexander Borisovich VLADIMIROV(summary)
Chief, Macroeconomics Policy Division,
Macroeconomics Forecasting Department, Ministry of Economics
Improving and Utilizing Economic Indicators of Russia
Russia: Dr. Yuri Vidimirovich BELETSKY(summary)
Head, National Accounts Department, Ministry of Economics

Japan: Mr. Susumu KUWAHARA(summary)
Deputy Director, Second International Economic Affairs Division, Coordination Bureau, Economic Planning Agency
How To Charge Public Utilities for the Efficient Allocation of Resources in Russia
Russia: Ms. Marina Urievna UKOLOVA(summary)
Chief Expert of Division, Enterprise Reform Department,
Ministry of Economics

Japan: Mr. Hirofumi ARAI(summary)
Staff, Second International Economic Affairs Division,
Coordination Bureau, Economic Planning Agency

Note: All opinions expressed in papers are those of the authors and not of the concerning institutions.