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By Matt Bivens

Skeptical Yavlinsky Critiques Reforms

The St. Petersburg Times, September 8, 1997

His may not have been the day's sunniest speech, but the critique of the economy Yabloko's Grigory Yavlinsky laid out at a conference for foreign investors Thursday certainly provoked passions.

Yavlinsky made his speech - a skeptical analysis of the existing economic situation and a measured attack on the economic policies of Prime Minister Viktor Chernomyrdin's government - and then, after fielding some questions, filed out of the Grand Hotel Europe's Krysha ballroom with his audience. He was met at the back of the hall by local journalists - some of whom were openly upset that Yavlinsky had not better used the forum to promote Russia as a good place to invest.

"Aren't you afraid you will scare off the foreign investors?" asked one radio journalist. A reporter from Kommersant Daily allowed that he agreed completely with Yavlinsky's ideas, but thought the Yabloko critique inappropriate for the ears of those attending the Business Week Russia Summit.

Yavlinsky, of course, was invited specifically to give such a critique. Other prominent speakers at the three-day summit, which ends Friday, were on the whole more upbeat about the investment climate. (See stories, page 4).

"One must speak openly and honestly with investors," Yavlinsky said in an interview with The St. Petersburg Times later in the day, reflecting on the disgruntled news reporters. "I dream of the day when the quality of Russian journalists reaches the point where they feel a good speech given before investors is one in which much of what's said is true."

"Moreover, when several years have gone by and things are better, and I come and say [to investors], 'Come on in, things have changed,' then they'll believe me. And I'm very much counting on speaking with them someday on behalf of the Russian Federation."

As such comments underscore, Yavlinsky is an ambitious politician. His Yabloko party, though it holds less than a fifth of the Duma and few national government posts, is particularly strong in St. Petersburg.

In the late 1980s and in 1990, Yavlinsky was Russia's best-respected free-market economist. A plan he helped author to transform the command economy to a market economy in 500 days was approved 213:1 by the Russian parliament in 1990, and attracted the attention of Soviet President Mikhail Gorbachev (who ultimately rejected it).

But a year later, when President Boris Yeltsin cast about for the best and brightest young economists to form his first government, he passed Yavlinsky over, in part because Yavlinsky was still working with Gorbachev's government. Yeltsin chose economist Yegor Gaidar as his top economic official, and Yavlinsky has never held center stage again.

In Yavlinsky's opinion, the Russian economy is at the moment headed for "stagnation." He said he expected 1997 would wind down with a 2 percent drop in GDP, a 4 percent drop in industrial production and a 5 percent drop in agricultural production.

Government policy makers predict GDP will hold level for 1997, and rise 2 percent in 1998 for the first time in years.

Yavlinsky said real unemployment is 18 percent and small business, which he emphasized was key to the development of a healthy democracy and economy in Russia, moribund.

Small business employs just 10 percent of the workforce and accounts for just 12 percent of Russia's GDP, he said. He said small business was held back by an unfriendly tax system, by centralized bureaucracy "and by the mafia, which puts pressure on these businesses."

Yavlinsky had strong, if bookish, words for the corruption that plagues Russia's national and local governments at the highest levels.

"This relationship ... between commercial activity and politics is leading to a very dangerous, very alarming situation in Russia, what is usually described as the criminalization of the Russian state.

"If the rules of the game are not changed, if the questions of property and of creating a competitive environment are not resolved in the next few years, then I have no doubt Russia will become a criminal-oligarchic system. And it will be very difficult for our children and grandchildren to change that."

That corruption is reflected in a mass privatization program that has left all but one-fifth of large enterprises under the same Soviet-era management, and fed by hazily defined property rights, which create a role for criminals to mediate property disputes.

"On the one hand privatization is completed. But on the other hand there is an absence of incoming capital, an absence of investment and a continuing industrial decline," Yavlinsky said.

The Russian economy also remains dominated by monopolies, Yavlinsky said, arguing that the top 100 companies account for 50 percent of GDP activity yet employ just 3 percent of the workers.

Yavlinsky said the existence of both the monopolies and of corruption had led to the government's most dramatic failure: the inability to foster healthy business competition.

"The revenues of most enterprise managers, in Moscow and in the regions, have been almost completely dependent on their relationship with local or central authorities," Yavlinsky said. "The main source of income for those in power or for those in control of firms is basically rents [or government subsidies] - rents sought by this rent-seeking society."

Yavlinsky said that he considered himself a supporter of First Deputy Prime Minister Boris Nemtsov, an old-time Yabloko ally who recently joined Chernomyrdin's government, promising to clean up corruption and launch pro-growth economic reforms.

"Unfortunately he [Nemtsov] is alone there, and more and more the government is dragging him down rather than him dragging the government up," he said.

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The St. Petersburg Times, September 8, 1997

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