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Russia's Economic Czar: A "Pessimistic Realist"

It's not easy being President Vladimir V. Putin's top economic adviser these days. That's especially true if you're an ardent free marketer in a state where entrenched bureaucratic interests still prevail. For Kremlin aide Andrei Illarionov, the maverick liberal economist who was the first to sound the alarm about Russia's impending August, 1998, crash and who now has the President's ear on all things economic, there's only one way to do this job: adopt the attitude of a "pessimisticheski realist," or pessimistic realist.

There's certainly not much optimism about Russia's economic outlook at the moment: A brief boomlet last year of 7.7% annual growth is petering out fast. The Russian ruble is getting stronger, eroding the economic advantages enjoyed by local producers after the August, 1998, devaluation. What to do? Recently, BusinessWeek Moscow Bureau Chief Paul Starobin and Correspondent Catherine Belton met with the weary Illarionov in his Kremlin office to hear his views on how Russia's economic woes should be tackled. Following are edited excerpts from their conversation:

Q: Russia's economic growth is slowing. Do you think the government has been moving too slowly to implement liberalization reforms and to stimulate growth?

A: This is always a concern. Some people say we are moving too fast, the others say we are moving too slow. I say, are we moving at all? Actually there is some movement now for reform. It's much better if we are moving slowly in the right direction than if we are moving fast in the wrong direction toward greater state regulation.

That's why we see the President following a particular style. He is not a person who is trying to do lots of things all at once and isn't finishing any of them. He has taken two or three issues and is trying to follow them consistently. I think this is a style of behavior that attracts respect. And it's something that can only be efficient.

Q: Will the economic slowdown push the government into taking more action?

A: Crises are conducive for economic reform. A good time in terms of getting rent from the outside world is a bad time for economic reforms. This rent is produced outside our economy and comes into the country either in the form of IMF credits, World Bank credits, or bilateral credits -- or in the form of portfolio investments or any other additional revenues from exports of raw materials and fuel and energy. These rents can produce only harm both in the short term and in the longer term. They are corrupting the authorities and are undermining their ability to conduct necessary reforms.

The best reforms -- and this is not just Russian experience, but world experience -- are implemented when countries are at the bottom of a crisis. Like any other normal person, I would be glad to avoid such a strong recipe for reform...but in world history, we do not see many examples of successful economic reforms without a preceding crisis.

Q: Are we near that point?

A: We are not moving toward some kind of full-scale crisis. I don't think so. But I do believe we are heading toward a gradual slowdown in economic growth. This will depend on the political feeling in the country, on the political consensus of the authorities. The main issue is, what kind of price would society and the political elite be willing to pay to get reforms done? But there is no ready answer on that, at least so far.

Q: What should be the priorities for reforming the Russian economy?

A: For me, the crucial issue is not reform per se but to make an attempt to deal with the structural peculiarity of the Russian economy, which is still dominated by raw materials and fuel exporters.

Q: How?

A: Royalty taxes on oil, gas, and metal producers could be used to create a stabilization fund to shield the economy from downturns on world markets.

Q: You have warned that economic growth this year could grind to a halt if policy changes are not enacted. Is this still a fear?

A: The most important factor for Russia's further economic growth is the real exchange rate. Over the last two years and the first three months of this year, the real appreciation of the ruble against the euro and other currencies of foreign countries that trade with Russia was at least 25%. This figure is approximately half the comparative advantage that the Russian economy gained from the August, 1998, devaluation. That's why one more year of such policy will put us in the same boat as we were in July, 1998 -- just before we jumped into the crisis. The political question is, do we need to repeat the experience we had then or can we avoid it?

Q: How could this be avoided?

A: The monetary instruments at the disposal of the central bank are not able to deal with the ruble appreciation. Russia has a positive trade balance of 24%, but once capital flight and payment of debts are taken into account, that leaves an overhang in the balance of payments of 8% that is driving the value of the ruble up. It is only possible to solve this problem with the budget. A positive budget balance of 8% of GDP would have to be created by increasing revenues and cutting spending.

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