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Discussions on Russia and EU expansion provoked calls for the west to open up.

Andrew Cohen reports from Salzburg, September, 2000

Russia and EU expansion were the topics at the forefront of debate and discussion at this year’s Central and Eastern European Economic Summit in Salzburg. While there was disagreement on the best course to develop the Russian economy, European Union enlargement was universally welcomed.

Russia was in the spotlight early in the opening session after Grigory Yavlinsky, member of the State Duma and leader of the Yabloko party, accused president Vladimir Putin of not respecting the rights of the individual. "The most important institutional change needed in Russia is human rights," he asserted. Yavlinsky claimed that the trend since Putin’s election is alarming. He cited the Kremlin’s suppression of independent sources of information, which contributes to a climate in which it is "impossible" to get positive economic results. Yavlinsky described the government as corrupt and oligarchic, a poor successor to the previous regime. "Pinochet is not an alternative to Yeltsin," he said.

"Sometimes we think we’re the only ones paying taxes in Russia," Ruth Harkin, senior vice- president, United Technologies The Yabloko leader called for a series of sweeping changes, including reform of the tax, banking and transport systems. He claimed Russia’s macroeconomic policy has failed because the institutions needed to support it just don’t exist.

Kurt Biedenkopf, minister president of the eastern German state of Saxony, picked up on Yavlinsky’s remarks. "A market economy can only exist with guaranteed human rights," he said. Biedenkopf also echoed concerns about the free flow of information in the region and indicated that news services on the Internet were more vital to the region than any opportunities for commerce.

Calls for the west to open up more to Russia were numerous. Yavlinsky urged a consistent policy towards the Kremlin with more emphasis on human rights, and less on realpolitik. There were also warnings against putting all the eggs in one basket. The relationship with Russia should be broadened to embrace opposition parties, associations, journalists and students. It should not, as in the past, focus almost exclusively on the executive. To great applause, Yavlinsky advised visa-free travel for Russians going west. He questioned the fears of western governments on this issue. "The Mafiosi don’t stand in line for visas," he said.

"There is a role for national policies to prevent a rise in nationalism," Danuta Hubner, executive secretary, UN Economic Commission for Europe Open borders and free movement of peoples was the hot topic picked up later by Gunter Verheugen. The enlargement commissioner for the European Commission sees his portfolio as a historic mission. He calls the EU’s opening to the east "the first effort to unite Europe", and a necessary attempt to ensure lasting peace and stability on the continent. But Verheugen acknowledged there were threats to that mission and urged that no further obstacles be put in the way of membership. "Do not delay the process. Do not impose new conditions," he pleaded.

Verheugen’s position was enthusiastically supported by a host of high-ranking regional officials. Macedonian president Boris Trajkovski said that "[EU] enlargement is the most effective tool to promote European values in south eastern Europe". Latvian prime minister Andris Berzins announced with pride that his country is holding to a commitment to complete accession negotiations by 2002. His counterpart in Lithuania, Andrius Kubilius, described EU membership as an "absolute priority" for his people. And Austrian president Thomas Klestil – with an eye to comments uttered by members of his country’s right-wing Free Democratic Party – voiced his steadfast dedication to enlargement: "Austria will remain fully committed to European expansion and integration."

Unanimity was also achieved on the need for western investment in central and eastern Europe. The role of foreign direct investment was deemed crucial, given the shortage of human and financial resources, especially in know-how and managerial skills. Zsigmond Jarai, Hungarian finance minister, said small and medium-sized enterprises play a significant role in acclimating the region to the process of globalisation.

"There are winners and losers when you open up the markets," Kurt Biedenkopf, minister president, Saxony For Russia, Duma legislators agreed that they needed to create strong and transparent tax and judicial systems to protect foreign investments. Yevgeny Yasin, director of Russia’s Expert Institute, argued that there are no serious disputes among the political parties on this issue. What is in dispute is the role and the influence of the executive branch of the government in the process, and how the changes are to be implemented. But Yasin was certain that a fundamental re-orientation in Russia is already underway. "We have experienced tectonic changes," he said.

Yasin’s optimism was only tempered by a need to remain patient. He reminded participants that change needs time, and president Putin was still new in office.


The positive outlook was shared by others. Andrei Piontkovsky, director of Russia’s Centre for Strategic Studies, believes "the economic prospects are brighter than ever before". But he admitted that there is a need to resist "dangerous political tendencies" of the kind that Yabloko’s Yavlinsky brought to the summit’s attention. Alexander Zhukov, chairman of the State Duma Budget Committee, added to the optimism with a prediction that reform guaranteeing property rights would be in place in the near future.

"What we are witnessing today in Russia is a true tax revolution," Alexander Zhukov, chairman, Duma Budget Committee The view of Russia among foreign business executives was also positive. Ruth Harkin of United Technologies acknowledged that her company "sometimes thinks we’re the only ones paying taxes in Russia". But she also admitted that "the Duma has become more centrist and more willing to work with the executive on economic reform".

The professionalism of Russian legislators was welcomed by many western investors. There was general agreement that relations between the Duma and the president have improved markedly since Boris Yeltsin’s tenure, and that legislators are more aware of the problems facing the country and the practical steps needed to overcome them.

So why isn’t investment flowing more freely into Russia and the rest of central and eastern Europe?

Charles Harman, managing director at Donaldson, Lufkin and Jenrette, blamed investors’ miserable past experience, especially the collapse of emerging markets in 1998-99. He said investors are afraid of being burned again. Then there’s the herd mentality – no one wants to be the first to go back in, but as soon as someone does on a large scale, others are likely to follow. Finally, according to Harman, investors have been able to score higher returns for their money in other regions of the world, notably western Europe and North America. The strength of the US dollar and local devaluations have meant that even when local currency gains are high, the return in dollars remains low, if not negative.

"The majority of managers in Russia doesn’t understand what a company looks like," Ruben Vardanian, president, Troika Dialog Ron Freeman, vice-chairman of Schroder Salomon Smith Barney, highlighted the role of domestic savings to increase investment in the region. He called for privatisation proceeds to be placed in pension funds which would in turn invest in domestic companies.

A sobering voice of reality was injected into the debate by Yuri Ponomarev. The CEO of Vneshtorgbank, Russia’s second largest after Sberbank, cited Russia’s continuing inability to participate significantly in international capital markets, the illiquidity of local markets and an absence of foreign banks in the country as the three factors causing foreign investors to shun Russia. Ponomarev claimed it will be "a while" before there are any changes to current market conditions, and until then Russians will have to suffer.

Finally, the participants addressed the threat posed by globalisation to increasing regional nationalism. Yabloko’s Yavlinsky again cited the need for the free flow of information to curb nationalist trends. He called for Euronews to broadcast in Russian as a gesture of inclusion from the west. He warned that the common European currency could mean replacement of the Iron Curtain by a "Golden Curtain".

"Pinochet is not an alternative to Yeltsin," Grigory Yavlinsky, member of the State Duma, and leader of the Yabloko movement Milan Panic, chairman, president and CEO of ICN Pharmaceuticals, summarised the discussion by saying all peoples in central and eastern Europe needed EU membership as a goal. He called for a date to be set for Russia’s accession to the body even if it’s 20 years from now, ignoring the fact that no Russian government has ever approached Brussels officially about joining. With the recent history of his own Serb people in mind, he lamented "those people who have no hope truly have nothing". And hope, he added, comes with carrots, not sticks.

All in all, the majority of participants pressed for a new mode of thinking to stem a rise in nationalism – a mode that transcends the Cold War mentality of spheres of influence and exclusion.

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Andrew Cohen reports from Salzburg, September, 2000

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