#17 - JRL 8282 - JRL Home
TITLE:
REMARKS BY CHRISTOF RUEHL, CHIEF ECONOMIST OF THE WORLD BANK'S MOSCOW OFFICE, ON CURRENT ECONOMIC SITUATION IN RUSSIA
[WB MOSCOW OFFICE, 10:00, JUNE 30, 2004]
SOURCE: FEDERAL NEWS SERVICE (http://www.fednews.ru/)

Ruehl: So, good morning. This is the first time we do this here.

As you know, we are going to introduce another one, number 8, of our economic reports. As all the others before, it has three main parts. The first one being an overview of the recent economic developments. The second one in this case is a summary of the recent government restructuring and what in our opinion it means and what the risks entailed are. And the third one is the summary of some new data which became available from our research on the concentration of ownership in Russia.

I think we should start and probably concentrate a little bit on recent economic developments and then I will say some brief things on the other two parts and then we can open it for discussion.

As everybody knows the picture of the Russian economy from the macro perspective and from the perspective of economic growth looks very exciting. Growth in the first quarter of 2004 is again about 7 percent, 7.4 percent, almost as high as the 7.5 percent last year. And the trend that growth moves away from the natural resource sector, from being dependent only on the high oil and gas prices has also continued.

In particular, there are two drivers of growth now outside the oil and gas sectors. One is investment which is branching into other sectors and the other is export which has grown more recently.

Now, investments themselves are still driven indirectly by oil and gas and I want to look at both of this a little bit closer now. Investments and exports.

The first point is that these are both components of industrial production and as we know from other regions it is industrial production that is most important for economic growth. That's a positive development. What we have done again as we did for a time now is to decompose industrial production into those sectors which are natural resource dependent and those sectors which are commanded more or less by domestic manufacturing.

If you do that, then you see that for the first time since the end of the year 2000 manufacturing industries are now growing faster than natural resource industries. The weighted average for manufacturing industries, more or less domestic manufacturing, is 8 percent and for the resource industries it is 6.8 percent in the first five months of this year.

However, if you drill down a little bit and you ask what caused this growth then below industrial production you go into manufacturing sector and let's look at this a little bit. That's the right table, Table 2 in your report.

Table 2 depicts machine-building, the most important component of manufacturing. You see that all sectors have growth, that's positive, but then you see that some sectors are growing much faster than others. And this shows you a good example for this double face of Russian growth. On the one hand you have communications technology, it's a sector which is growing independently of oil and gas simply because there is so much catch-up growth and potential in Russia.

On the other hand, you have railways, your railway car production which grows with 50 percent having grown by 47 percent last year. And these are of course railway cars which are produced for transporting oil which cannot be transported any more through the pipeline system because it's overburdened.

So, the point is when you really drill down and try to find out what causes industrial sector growth, you look at manufacturing, what causes manufacturing growth, you look at machine-building, what causes machine-building growth then you see these two extremes: one key component clearly is just a reflection of the higher demand for oil railway car production. Another key component is something which is new, like communications.

And this little table shows you something else or rather, it hides something else which is interesting and typical of Russia's industrial structure. If you look at the left table, manufacturing, it shows you that the average of the growth rates in machine- building should be 14 percent. This is here, this is machine- building, which is this one.

But if you look at all the components of machine-building, they add up to more than 14 percent. And the reason for this is that there is a large part of the manufacturing industry which is not in the statistics, which is associated in one way or another with military production.

And as you see, if the average which contains these sectors is much lower than the average which does not contain these sectors, this is more or less stagnating industry. So, the point is, it also shows they are not only drivers of growth independent from oil and dependent on oil, it also shows you that there are still sectors in machine-building which are growing very slowly.

And this is my first point, this is the core composition of Russia's industry. Some multiplier or knock-on effects from the high oil and gas price is spreading, for example, railway cars. Some new sectors in the services and communications and so on are growing very fast and becoming independent. And a large sector that is hidden or forgotten is old industries which are sort of swimming along, either shrinking or not growing very much and not changing very much.

And we will come back to this large hidden sector later because it's that hidden sector which still gets subsidies and which still is in locations where it cannot be sustained and so on.

Now, I said that this growth is also branching out and driven by exports and by investment. Table 3 shows you the two major components of industries and how export growth is much faster now than domestic growth.

The reason is that growth in the other CIS countries, in almost all of them, is much higher than it is in Russia. For the third year in a row actually the CIS average has been growing faster than Russia. And why there is also some potential for Russia to catch up it also now benefits Russia in the sense that this is where Russia's exports and manufacturing go. These are not the oil and gas exports, obviously.

The second component of rapid growth is driven by investments. Investment growth is, I think, 12.8 percent, so almost 13 percent again over the first quarter. If you look at Table 3, you see it's basically now sustained on a high level.

And when you see all this investment growth rates, we ask yourselves how this can go on. And the answer is, Russia still has some way to go here. Russia's share of investment in GDP is about 20 percent now. This is a little bit more than very well developed economies like the US. The US, for example, is 18 percent. But it is still less than the average of other middle-income countries or the average of other low-income countries which both have 23 percent.

So, there is no reason to suppose that these investment rates should decline any time soon.

And just very quickly. One is investment, as you see in Table 4, the comparisons of capacity utilization and investment. This is also interesting in that it shows you how the increase of capacity utilization continues to fall until 2002. And this is, of course, reflective of this old argument which we have repeated many times, that a lot of the immediate growth after the crisis was due to better utilization of existing capacity.

Now for the next two years, 2002 and 2003, and the first quarter now, you see how utilization rates start to accelerate again reflecting new capacity which has been brought onstream showing that investment really now changes the capital flow.

Now let's jump a little bit and ask, what does this high rate of investment mean for financial sector growth and for firm performance. And in this context often the dangers of overheating are discussed nowadays. Is there such a danger of Russia's economy to overheat, to grow too fast, so that there is some instability?

If one looks at the few numbers, they are really impressive, there are three record entries for the year 2003 which have to do with financing growth. The first one is credit to the private sector. It grew by 28 percent last year which is the highest growth rate ever in Russia. If you look at Figure 2, you see the share of consumer credits in total private credits, consumer credits are growing at 100 percent or so per year, very fast, but from a very low base.

In Russia there are now 11 percent of the total, in other countries they are way above 50 or 60 percent of the total. So, the first indicator is credit to the private sector -- it grew the faster ever at 28 percent in real terms. The second indicator is domestic bond financing also grew at the most rapid pace ever last year. Outstanding domestic bonds grew at 170 percent bringing the stock to about 5 billion US dollars. And the service external financing and again it was a record year, never before have so many Eurobonds been issued by Russian companies as last year. Eurobonds issued outstanding grew by 130 percent and is now about 12.5 billion.

If you look at these financial sector indicators then one would see private sector growth of 28 percent in real terms, foreign bond growth, real bond growth -- 130 percent, domestic bond growth -- 170 percent. One might be tempted to conclude that this is overheating, too fast.

However, there are, I think, three arguments why one could actually be quite relaxed about this danger. The first is the levels involved, both the level of credit and the level of bond issues is very low compared to other countries. The second is again related to this dual structure of the Russian industry. Because if one looks at enterprise performance in Russia, one sees again a strange phenomenon. We see on the one hand that enterprise profitability -- this is average profitability measured as profits out of revenues -- has gone up by about 20 percent.

So, that seems to fit in the picture: huge investments, huge credit expansion and huge profitability growth in the enterprise sector. However, on the other hand, if you look at these figures published by Goskomstat which indicate loss-making enterprises, you see that the share of loss-making enterprises is still at forty- something percent. The share of loss-making enterprises at 41 percent is enormously high. Even if Goskomstat maybe captures only the old enterprises.

Moreover, if you look at other indicators such as non-cash settlements, barter which is still going on, in Figure 4 of overdue payables, bills which have not been paid on time, and Figure 5, again you see there is no rapid improvement. There seems to be a stock of enterprises which just operates with losses. And the fact that these indicators do not really move while on the other hand profitability, investment and so on all increase shows you, goes back in my opinion, to the fact that, the dual structure of industry in Russia, with one segment of enterprises being new, modern and growing very rapidly and creating all this credit growth and then an old segment of enterprises, including the hidden enterprises in the defense industry where everything is the same as before.

But it's of course this old segment of enterprises and, more precisely, the people employed there which are the long-term problem. And I would just like before leaving this field to remind you of the findings of this economic report that in many regions it is actually transfers from the federal center and hiring people in the public sector jobs, low-level and low-paying jobs which keeps them afloat.

So, if one takes these two observations together, this hidden here which is visible in the growth rates and the large increase in public sector employment, which we think is more or less subsidizing unemployed people, then one has to call employment, namely a core of unemployed people and unprofitable enterprises being financed with the oil revenues.

So, I am going to leave this gross picture and just one remark. Just three brief remarks because this has been also covered I think the day before yesterday by our colleagues from IMF.

The first one is there is the continuing problem in monetary policy, should we target inflation rate or should we target the real exchange rate and the fact that you cannot do both at the same time. We do see that there is continued pressure on the real exchange rate as these petrodollars come flowing in. And this shows in an inflation rate which has become entrenched. It seems to be stuck in this 10-11 percent range and refuses to go down to the target.

So, if you look at the consumer price index, it went up 5.4 percent between January and May, which means it can grow no more than 4.3 percent for the rest of the year, which is highly unlikely to meet the target. But it also means that if the Central Bank would decide to focus on bringing inflation down that there is much more volatility on the nominal exchange to be expected. So, the real exchange rate will continue to move upward, but a policy decision is to be clarified whether focusing on exchange rate of inflation policies.

And that of course related to this whole debate of lack of instruments of the Central Bank and so on which I am not going to elaborate on now.

The second point I want to highlight on the macro picture has to do with capital outflows. Again, we see a mixed picture, we see the measured capital outflows continuing to go down, in the first quarter it 4.4 billion dollars. And we see capital flight, illegal capital outflows not really going down. This is now at 3.5 billion dollars in the first quarter and very much in line with what we have seen in previous years.

Everybody knows that this is not money leaving Russia in plastic bags, but these are export revenues from oil which are not entering Russia in the first place. So, you can draw your own conclusions that this means that this money is not flowing back.

At the other end we see an increase in external debt for the first time, pretty massive increase from 153 billion to 182 billion at the end of last year. This increase is a shift because that is an increased caused almost exclusively by the private sector reflecting borrowing abroad in order to finance this growth which we have discussed earlier.

So, while the inflows, official inflows of investment and the official outflows improve, illegal capital flight remains stubborn. Foreign direct investment remains relatively modest and both seem to be indicators of the perception of the business climate in Russia.

My last point is on the stabilization fund and what to do with the money once the ceiling is hit. There is a debate now when the 500 billion, the cap on savings, will be reached and what to do with this money. And I would just want to say two points on that. The first one is, if the purpose of the stabilization fund is to stabilize the economy, then the only legitimate use for that money would be for debt repayment. Everything else would defeat the purpose of the fund.

Using this money for domestic expenditure, domestic investments or even for domestic pension funds which are invested in turn in Russia is the same as counteracting the budget target and the budget surplus target.

And the second point is just, I think I said this before, but the very idea of having a cap on savings and saying, after 500 billion cap the government or the Duma decide what to do with it is self-defeating. There should be a stabilization fund without such a ceiling on the accumulation of funds.

That's all -- I am usually talking too long -- so, that's all on economic developments. Very quickly on the middle part which deals with an assessment of the recent reform of the government structure.

Essentially there are people who are asking two questions when we look at this government reshuffle, the government reorganization as it is called. They say, is there any meaning to this or is it just playing musical chairs. The second question of those a little better informed usually is, what does this government restructure have to do with the much broader goal of public administration reform. Does it mean we do what is supposed to be done at the end of public administration reform first and does it mean the public administration reform in the broader sense will not happen.

We think it is actually a very laudable and very drastic start which has been done and we are prepared to support it, so we have a higher opinion than most people of these reforms. Many of these things we have been discussing with the government for a long time, we also think it does not contradict the idea to have a broader civil service and public administration reform. You can do the government restructuring first.

And to do this first, with all the hiccups it has produced and the paralysis of the government it has produced, at least sent the right signal to a bureaucracy which is very well versed in defending their turf, then this is meant to be serious.

When it was implemented and actually the government ceased to function for a few weeks, but the least you could see is that Russia can do very well without a government.

But of course there are huge risks, and some of them you'll find discussed in this middle section. The real risk that you get stuck in that, I am not saying it will be successful, I am saying it was a drastic step.

The risks are outlined here, and that's also referenced on that site, and I am prepared to discuss that in more detail later on. I just want to name the two most important ones now. First, there's communication, and it was pretty obvious that not even those most effective by this reform had any idea of what was going on. And without communicating clearly, you can't really reorganize any organization.

And the second has to do with providing adequate budgeting for the reform. People tend to always say you know you have to fire half of the civil servants and then you double the salary of the rest. In reality it's a bit more complicated.

At the end of the section you some very rudimentary estimates summing up the total requirements of this first step to about two billion dollars. That is a substantial sum of money, just for organizing this. So, having these funds allocated in a transparent and clear manner would also go a long way improving the communication problem the authorities currently seem to have.

So, here and then in the additional material on the website and so on, there's a lot of material which people can use to simply learn more about it, because I think this communication problem is not only affecting civil servants. It's affecting all of us. Nobody really knows how this is supposed to be working. And so we try collect some material to improve that situation also for journalists.

We have people working on this and having worked on this for a long time. So, I would encourage you to contact Marina and she bring you in touch with these people who have knowledge of the subject.

So, the third and last part is an update on this chapter on ownership concentration, which has caused so much discussion. Again I will try to be very brief and leave it to the discussion. What has happened is that we received two bunches of new information. Recall that what we did originally was we were sort of going bottom up in surveying businesses, trying to find out ownership concentration by looking at factories first and then going all the way up.

At the same time other people -- the Foundation for Perspective Studies and Initiatives -- were working on going top down. So, they looked at what they thought were the biggest groups in the country and then tried to re-establish their consolidated accounts.

So, we were looking at who controls what from the bottom up and were missing probably some transfer trading companies and so on. They were looking from the top down with the aim of consolidating all the accounts of the biggest ten groups. And what we did we merged all that data. It turns out that this did not change very much. We were reaching a pretty similar target, in particular with this group of 23, which has not reduced to 22 through a merger. This step did not lead to major changes.

The second change is that the data on sales and employment and therefore on productivity for the year 2002 became available. We could afford only the 2001 data before. So, we could recalculate these indices of economic performance of large owners versus foreigners, versus government, on companies versus smaller Russian owners using the 2002 data and the 2001 data, which are now getting closer to the year 2003, from which our ownership data was.

And we get the following key results. First, nothing changes in the fact that there exists a group of nationally significant owners of a size which distinguishes them from the rest of the economy, 22 of those individuals and groups.

Second, nothing changes in the fact that ownership in Russia is extremely sector-specific. So, we still see the large owners concentrated on key natural resource and large manufacturing sectors, foreigners being concentrated in the consumption, final consumption production and retail goods, and the government, the regional or federal government being concentrated in a few sectors such as pipelines, jewelry and rubber, some sectors which have never been privatized. So, after privatization the Russian economy has not been mixed really. There is no functioning, there are no big secondary markets for trading ownership rights. So, it is still significantly split across sectors. There is no mix there.

The third point, as this is something which changed compared with the 2001 data, is that the productivity, total factor productivity of the larger owners grows faster than the productivity of the small Russian owners. Remember that using the 2001 data before, the conclusion was that nothing makes these big owners perform better. So, their level was not significantly better than that of small owners, and their growth rates were not significantly higher than small owners. And both small and large private owners were performing much better, and foreigners were performing better, than state-owned companies.

What we see now is that still the levels of large owners and foreigners and small private owners are higher than the state sector. But productivity growth from 2001 has been higher with the large owners and the foreigners, higher than with the small owners or the government. The productivity in their companies grew faster.

And the last point was also slightly different from when we used 2001 data. When we used the 2001 data, investment of the large owners was higher but only in the energy sector. It looks as if investment rates are pretty much the same in the year 2002 for the big and the small owners. Now what caused this improvement in productivity growth rates? We don't know. It could be that indeed they took enterprises which were slow performers and restructured them more successfully. It could be, on the other hand, that they just got the best companies with the highest growth potential as output took off. It could also be the result of the previous higher investments or it could be the fact that oil and gas prices went up so much, and they look concentrated in those sectors.

But we sort of a dynamic picture now forming and changing and what we need simply is the 2003 data to complete that story, and we will follow up on that story.

And why are we interested in this? Why do we care about this? For two basic reasons. Because we like many other people have argued for a long time that one needs to do everything possible to support new enterprise growth and to support small and medium enterprises, including getting the government off the back of these enterprises, limiting administrative barriers, limiting corruption and so on. But this, of course, has a flip side because one needs to protect competition also as far as large enterprises are concerned. And as long as this, in this huge economy, it is not clear who wants what and how this affects economic performance and how it relates to favoritism, and how it relates to the relationship between the government and the state. Somebody has to push this research agenda. Because without precise knowledge of this structure one cannot devise intelligent rules of protecting competition.

And the second reason is that now if you look at Russia with the eyes of an outsider observer, there still is the basic problem of governance, which is coming to everybody's mind all the time. And I am not talking about corporate governance within the corporate sector. I am talking about governance in a broader sector, including defining rules which are binding for the public sector and the private sector and including defining clear lines between them. What I mean, when you look at, when you talk to anyone concerning Russia, he wonders if this Yukos affair is something situational or something systematic. As long as this question is there, without even answering it, as long as this question is there, the country has a problem. And we have looked at various aspects of that from the size of transfer pricing to the need of finding out what is controlled, how concentrated ownership is to the need of defining rules which are binding for the government as well, to prevent this kind of murky situation. And I think it's one of the tasks which we will have to continue.

It's a discussion many people don't want to have, especially at the current moment, but we think it needs to take place and because there was a lot of misunderstanding why we do what we do, let me just at the end give you three things which I want to be clear about which you did not inquire.

Let me point out also at the dark side of high concentration that private owners may collude with the state and so on. Then still nothing in that data which we have points, gives any argument for renationalization. This is not an issue at all.

The data are very clear on this on all levels. Government enterprises are worse performing and more incompetent than private enterprises no matter who owns the private enterprises.

The second point, and I've said it already, is we are talking about rules of competition which would be binding for all for the public sector as well as for the private sector companies which are currently lacking. Often in Russia the problem is there are good laws and bad implementation. Here there are no good laws and there is no strong agency to implement them.

And certainly people have a sense of wanting to restart privatization, take some of these companies back to the state and then resell them. That's obviously nonsense too. We don't advocate any of this reprivatization and then reselling ideas. The reason is very straightforward. People are right in saying that many of the previous privatizations may not have been fair, may have involved all sorts of bad behavior.

And there is just absolutely nothing which I can see in the competence of the government which has changed. So, if you allow them to take it back and reprivatize it, you are likely to double the error instead of making it better.

Just as much as arbitrary sort of amnesty thoughts also -- they all would create more uncertainty on property rights, multiplying the negative effects which we currently see and therefore we think they should not be entertained.

That's all on this economic report. Before I take some questions, let me say a couple of words on my own behalf. Most of you know already that I'll be leaving in Russia in about two weeks time. And so I wanted to say good-bye to you and I wanted to thank you for this cooperation which we have. I want to extend this thank you to a number of other people.

First of all, when you see this report which we have created and which we have now eight versions, there is the economics unit on top. It's not that I am writing this, I don't, I just sell it to you. So, I want first to thank the 5 economists in this unit and I want to thank them for producing this and express my hope that this will be continued smoothly.

And second, I want to thank Marina and Tanya and these people who make these meetings possible even though they are always possible on the last second and so on and so forth. And I want to thank all these other helpers like Boris here. I used to say, I don't need to give speeches any more, I can send Boris, he knows all that I know.

Thank you for coming. And one person who is not here any more, but I believe that this kind of openness and discussion which we were seeking over the last 3.5 years, I was just the face, but it has been initiated by the previous director Julian Schweizer and even though he is gone by now, I think he had exactly the right instinct of how he should behave and how this public interaction should be moved from the backroom negotiations into the domain of public discussions. That's what we try to implement and I hope that this will continue, I am sure this will continue.

So, you probably all get set to ask me some tough economics questions.

Q: A clarification and a question. Could you specify exactly what sectors you describe as stagnant? You have referred to the dual economy which has some stagnant sectors. Exactly which sectors?

Ruehl: The first obvious ones are most of the sectors relating to military production. Without knowing the data, I would think that they are fairly stagnant. And then we have heavy industry, machine- building. As a rule of thumb, those who do not show up in the export statistics, meaning that they cannot even be exported to this market, this narrow market in the CIS, those would be the ones with the lowest growth potential.

Q: The Russian government is discussing points of growth or windows of opportunity. You have been an analyst of the economic situation in Russia for a long time. As a farewell, could you tell us what points of growth and windows of opportunity you see in the Russian economy?

Ruehl: There's two answers to this. One is what are the drivers of growth if you let the economy go, and the other answer would be what should the government do and should it target any particular sectors?

The first answer therefore, if you look at those sectors which grow naturally, you have a very simple rule of thumb. And this holds for foreign investment as well as for Russian investment. Everywhere where people manage with a minimum transfer of technology or capital to have maximum quality improvements of everyday products. It sounds very abstract. That's the sectors which do best.

My favorite example is fruit juices. This is an everyday product, everybody knows fruit juices, there used to be fruit juices in the Soviet Union, they were probably of a lousy quality but they always have been here.

The economy opens, every fruit juice gets imported. Someone has the idea with a minimum quality or technology transfer to produce fruit juices domestically, immediately demand goes from imports to these domestic products. Why? Because their quality is now world standard and their price is lower.

And this is what you see in industry. The coating industry. An everyday product, paint which wasn't very good is now booming because imports are replaced with domestic coating industry.

Firms producing things for construction, window panels and so on. Even in the retail sector small and inefficient stores are being replaced with large super markets. And it depends on the work of the service industry as well. I answered this in such a long fashion because it's important from the macro perspective as well, it's not just the micro level here.

As you know, there is this widespread fear that as the exchange rate goes up, imports will replace domestic production. But when we look at the data, it's always puzzling because the price elasticity of imports is not very high. In fact, many imports seem to depend on people's income. So, they buy foreign cars, they have a certain income not in response to a certain exchange rate movement.

And I think it's this desire for quality which is behind this. People when they have enough money want a good car and they prefer a four-year-old Volkswagen over a new Lada. The moment the Ladas produced are the same quality and cheaper than this Volkswagen they buy Lada, they don't care about foreign or not, they care about quality.

And this is why those companies which can improve the quality of the everyday product and then go into this gap of high prices for imports and exploit that, they do best. And we see it even in the macro data.

The other answer when you ask what should the government do, which sectors, then the answer is very short. It should not follow any industrial policies.

You asked about the sectors which are the worst performers. Look at it. Car industry, aviation industry, certain machine- building industries, the military sector. They are all beneficiaries or benefit sooner or later from protection or government support. Which of course, is not very successful.

Q: You said no data could justify an argument for renationalization. I just wanted to ask about YUKOS. What do you believe to be on the government's agenda, the ultimate objective in this process?

Ruehl: I cannot look into the head of people who are making decisions, I don't know what the agenda is. But I do know, sometimes I have questions as to whether there is an agenda. It looks from the outside or everybody perceives it as such a homogeneous block making decisions and so on, but if you look more closely, maybe it's just stumbling along from mistake to mistake, so to speak. And maybe one does not need to be so respectful when debating it.

The second answer is also important. The problem is not what they do. The problem is that a journalist asks some World Bank representative: What do you think will happen with Yukos? That's the problem, because that's the message which is sent that there is uncertainty and that the stability which was so successfully re- establishing, and a good investment climate, in Russia is being eroded. That's the key problem here. That indeed was done by designers who imply of some omnipotent government, but it was badly designed. Maybe it was done by a chain of mistakes.

Q: I would like to ask almost the same question. ... (off mike) nationalization and against redistribution of original privatization. And to many of us, including me, the Yukos affair looks like a successful attempt of exactly that. How do you expect it to influence growth prospects of the Russian economy?

Ruehl: Let me answer this way. If you look around, at all the developing countries who happen to be oil exporters, there are only two where these natural resources are not state-owned, which is Russia and Kazakhstan. If you look, on the other hand, on the nature of state-owned companies in Russia and the rest of the world, you see that a Soviet, old-fashioned state-owned company is not the same as a state-owned company in Germany or in England or the US. If you look at something like Gazprom, just as an example, these are opaque, more or less independent and extremely hard to control entities, these Soviet companies. Whereas if you look at state or partially state-owned companies in other countries, where they are run by professional management, they are behaving as if they were competitive, operating in competitive markets, almost behaving like a private company would behave.

The difference being that in some companies the state happens to have some shares, but is not busy 24 hours a day controlling them, directing them. They are commercial.

Now I can turn the question around. Would not it look tempting to you, if you would be in the government? Maybe we can instead of having these Soviet molochs establish some state-owned firms or firms in which the state has a stake, which operate as commercial companies? That must be a tempting thought. So, just like you make Gazprom a little bit better, you may a formerly efficient company maybe a little bit worse, but you let it run on a commercial basis. That must be tempting. But is it a good idea? Can it be done? Would it establish huge disruptions? I don't think it's a very good idea to renationalize it, even in the best of circumstances.

And when I look at the performance between state-owned oil companies and private oil companies, I see a big difference. And it may be more intelligent to have private companies and, you know, create an environment where they face competition, rather than trying to manage it yourself. Just like Kazakhstan did, for example.

Q: ... (off mike) ...

Ruehl: Your are right, credit is going faster than real growth and so on, but this is not the real problem, because new markets are developing, consumer credit is new. Just think of mortgage. Once the mortgage market takes off, you will see explosive credit growth, which is not necessarily bad. It's just filling a gap, because it was not there before.

The problem is the institutions which carry this growth are not very stable. The banks lack that quality. They are regulated very poorly. There are many of the new institutions: pension funds, mortgage lenders, which really emerge. They are new and inexperienced and will probably not be supervised very well.

And so you have rapid growth and an unstable environment. That's the problem. Look at this operation of the Central Bank. It finally tried to close one of the more obvious money laundering institutions, and how difficult it was. That's the problem. There is no capacity to supervise and do an ever stable system, to channel this course.

Q: In what way an anticipated increase of the rate by the Federal Reserve System can influence Russia's financial state, especially given that the share of borrowings is high in this country? Is the epoch of inexpensive money over? Are there reasons to expect capital flight?

Ruehl: Well, this is worldwide that the era of cheap money may be coming to an end. But I think the effect on Russia is grossly overestimated. In the emerging markets, they refinance all the time. But if you ask how many portfolio investors will be withdrawing funds from Russia because of a possible zero point something increase in the Federal interest rate, and you compare that to the effects of domestic policies and the ability to control banks, the problem with Yukos and so on, then you have an entirely different order of magnitude, and then it turns out domestic policies are much more important.

Q: ... (off mike) ... on small and medium businesses. What's happened to this research? Are there any results to share?

Ruehl: As you know, we have this ongoing project of having an annual survey on the conditions for the smaller and medium enterprises. The first two we did together with CEFIR and then published them together with CEFIR. This is now done by CEFIR and the results are published on their website. And the plan was always that we would hand it over to them and they would continue it.

Moderator: I would like to wish Christof success in his new job and assure you that those reports will be prepared and a new economist which will soon come here, will meet with you. I would like to take advantage of this opportunity and invite you to attend on July 23 -- I will send you an official invitation -- to meet with the new director for Russia, Kristalina Georgiyeva, and the new economist. So, you could ask them questions in an informal conversation, tell us what you expect from us. Thank you very much. Thank you, Christof.