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Ex-Soviet states eye economic union

PRAGUE, Czech Republic, March 27 (UPI) -- While West Europe revels in the unifying success of its new euro currency, finance leaders in the now-independent nations of the former Soviet Union are considering similar steps aimed at mingling their economies and creating another multinational powerhouse on the world market.

The steps under discussion include a proposal to form a single, Moscow-centered currency system for at least some of the 15 countries in the region dominated by Russia and making up the Commonwealth of Independent States.

Another plan calls for banks in CIS countries to work together to attract foreign investment capital, mainly from the West, while fully embracing globalization.

Rumblings of a revival of Soviet-style economic commaderie, minus the communist five-year plans and military element, were evident Wednesday at a bankers conference in Prague. Representatives from central banks in Ukraine, Latvia, Russia and Belarus were among the CIS financiers eyeing the proposals for cooperation at the European Banking and Financial Forum.

One proponent of closer relations was Mikhail Sarafanov, chairman of the International Investment Bank in Moscow. He said the bank is "being created from scratch" from remnants of the former Comeco economic community.

Comeco was formed in 1949 as a financial framework for communist countries. It peaked with 10 member-nations including the Soviet Union, other Warsaw Pact states, Cuba and Vietnam before collapsing in 1991.

Sarafanov said the CIS region is poised to attract longterm foreign capital "in the context of globalization." He predicted the influx will begin in a few years, after "the post-Soviet states and (former Comeco) member countries go through the current transition period."

Key to that transition is the ongoing process of settling Russia's huge debt inherited from the Soviet era. As of last year, Moscow owed more than $70 billion to nations in the Paris club, London club and its former Soviet allies.

Private investment to former Soviet countries should increase substantially once the debt problem is solved, Sarafanov said, adding that "this year we will finalize the technical phase of this settlement."

On some cooperative proposals, the financiers were divided.

The single-currency proposal, for example, was strongly promoted by the head of the National Bank of Belarus, Pyotr Prokopovich. He said the plan was discussed in detail last month at a meeting of CIS leaders in his capital, Minsk.

The region's dominant currency now "is either dollars or euros," Prokopovich said. "But our economy is closely linked to neighboring countries" of the former Soviet Union "and this needs to be continued and even strengthened."

Although Prokopovich did not name potential currency sharers other than Belarus and Russia, he said the changeover could begin in two years. "We hope other post-Soviet countries will join us," he said.

But Oleksandr Sharov of the National Bank of Ukraine said his country would keep its national currency unless invited, perhaps in 10 years, to join the euro zone and the European Union.

Speaking of the Kiev government's recent financial decrees, Sharov told United Press International, "We've made European integration our choice, not CIS integration."

Nevertheless, Sharov acknowledged that business ties between Ukraine and Russia, more than a decade after the Soviet collapse, still keep their economies closely linked. "Of course we would cooperate with Comecon if it brings in money," he said. "Russia is a rich country."

The latest World Bank report on Russia said its economy expanded faster than expected last year thanks to an emerging consumer market, and despite repercussions of Moscow's 1998 financial crisis. But private investment growth last year was just 8 per cent, half of the level posted in 2000, and most of the money was pumped into energy and other natural resource projects.

Russian government reform in business regulation and taxes will be needed before adequate foreign capital can arrive, concluded the World Bank report as well as a report last year by the European Bank for Reconstruction and Development.

Yet the reports also said Russia's parliament and President Vladimir Putin have pushed through major reforms in the past two years that should stimulate investment.

Russia and other CIS states also are speeding up the privatization of state-controlled companies. The exception is banking. In Russia, for example, state-owned banks control two-thirds of the nation's capital and the largest, Sberbank, controls 76 percent of all household deposits and 20 percent of the precious metals market, according to EBRD.

At the bankers' conference, Latvia Ministry of Finance Secretary Valentina Andrejeva said her small country has almost completed privatization "and now strategic investors are coming in." She added, "Latvia has solved most of the problems from the transition process."

Ukraine, however, is struggling. Sharov said about 30 of the country's 187 banks are "in the process of closing." And consumers haven't recovered from the loss of all their life savings -- about 120 billion Russian rubles -- when the Soviet banking system dissolved a decade ago.

"It all went to Moscow," Sharov said. "It was a huge amount for our country -- more than the assets of all the banks we have now."

Andrejeva said she chaired a Latvian committee that tried to negotiate a savings-loss settlement with the Russians. "This issue hasn't been resolved but there've been no negotiations for the past two years," she said.

Yet for most of the bankers the need build regional economic cooperation -- and perhaps someday a competitor to the European Union -- outweighs the lingering sting of savings bank losses and the 1998 crisis.

Sarafanov said his bank, created to promote development in the CIS, has about $700 million worth of projects in the pipeline for the next two years. He predicted more activity as the ex-Soviet partners work together.

"The business relations between the Comeco member states is continuing (because) it is politically possible." Sarafanov said. And referring to his bank, he said "we plan to return to the markets in 2003."