TOP INTERVIEWS Exclusivity World Investment News Mr. MIKHAIL KASYANOV PRIME MINISTER OF RUSSIA Moscow, 15th of May, 2002 "Ladies and Gentlemen, Last year saw an unprecedented expansion of the political dialog between Russia and the United States. Four summits between Presidents Vladimir Putin and George Bush were conducted in a short period of time. We are now looking forward to President Bush's visit to Russia next week. But the number of meetings - however large - itself does not matter much. It is the friendly and sincere atmosphere of these meetings which enables us to say that our two countries are probably closer to each other now than ever before. One clear confirmation of the new status of our relations has been our everyday co-operation in the fight against international terrorism after the tragic events of 11th of September in your country. Russians took very close to their hearts this national tragedy. The powerful signal is being heard by the general public - about 80 percent of Americans and Russians each say that they do not consider the other as enemies. Now our task is not to miss this unique opportunity to transform the current favourable environment into concrete cooperative actions, which in turn will create a firm framework of mutual understanding, trust and benefit for future generations of Russian and American politicians, businessmen and ordinary citizens. Business communications constitute an important dimension of the system of multi-faceted cooperation between our two countries. The Russian-American Business Dialog was launched a year ago and has already become a significant force strongly influencing decision making in bilateral relations. It is my firm belief that business leaders - in general - are more forward-looking than bureaucrats and can intervene when the latter fail to undertake proper actions. What I have just said of course does not refer to the U.S. Secretaries of Commerce, Energy and Treasury or to the U.S. Trade Representative, who are in continuous productive contact with their Russian counterparts. We welcome the increase in inter-agency economic contacts and their transition to on-going dialogues. We are confident that this work will help fill political agreements with the specific substance of economic cooperation. I will mention only one example from our potentially rich field of contacts. During my visit to the United States in January, I discussed with Vice President Cheney a new field of mutual interest - an energy dialog. Russia is the world's largest energy exporter and during the most difficult periods of transition we did not stop deliveries to our consumers even for a day. Both our countries are interested in stabilizing prices and introducing more predictability in the world energy markets, exploring new gas and oil fields as well as developing new transportation routes, improving the safety and efficiency of nuclear energy stations, and developing new energy-saving technologies. We already have experience of successful cooperation in this important area - I refer to the Caspian Pipeline Consortium joint venture, which is the largest US investment today in Russia, and to Sakhalin-1, a 10 billion dollar project with Exxon-Mobil, which has already entered the implementation stage and soon will supercede the Caspian Pipeline at the top of the list. Our countries are natural "brothers in energy" and we are looking forward to actively building new dependable energy resources together with Russian and American businessmen. Let me now describe in brief some recent developments in Russia. The main things we have accomplished during the last several years in Russia are the normalization of public life and the step-by-step restoration of the middle class, which suffered most during the financial crisis of 1998. Stability at last has firmly settled in Russia. Now business people increasingly reject short-term and risky gambling for the sake of more credible longer-term alternatives. At the end of the day this means that the values of a democratic society and a market-based economy are shared by a absolute majority of Russians. It is worth mentioning that more than 80 percent of our national product is now produced in the private sector. This compares positively even with some EU countries. The Russian government is not subsidizing any sector of the national economy other than agriculture. Even there the level of subsidy is marginal by international standards. The market status of Russian economy is nevertheless questioned by some countries, including the United States. I hope this can be resolved soon and that any enduring prejudices - sometimes fed by vested competitive interests - will give way to a realistic assessment of Russia's economy. The same refers to the infamous Jackson-Vanik amendment, which continues to discriminate against Russia though its rationale ceased to exist ten years ago. Russia has made significant progress in creating a market infrastructure and reforming the economy, which has been growing at a healthy rate for the fourth year running. As a whole, industrial output in our country has grown by one third during the last three years, and both GDP and real incomes increased by more than 20 percent. After being a proverbial curse for any reform effort in Russia, agriculture has also begun to emerge from the crisis - last year Russia switched from grain imports to exports for the first time in decades. Inflation has come down dramatically from 84 percent in 1998 to an annual level of 12-14 percent and is now predictable. Continued structural adjustment of economic distortions inherited from the planned economy did not allow us to drive it down more quickly. Next year for the first time in the history of new Russia we will be targeting single-digit rates of CPI. Foreign currency reserves have more than tripled since 1999. Due to fiscal discipline and prudent debt management, we have been able to reduce government debt from more than 100 percent of GDP in 1999 to less than 50 percent now. After accomplishing the crucial objectives of monetary and fiscal stabilization, we have just started on the so-called "second generation" of reforms, which involve deep structural transformations in the national economy. Taking into account the urgent need for systemic transformation, our Government cannot afford to implement only two or three key reforms as governments in other countries usually consider sufficient. The list of reforms we have to focus on is quite challenging. In addition to tax, administrative, judicial and land reform, which have already been launched, we have started to modernize the financial sector and pension system to revamp natural monopolies and the housing and utility services sector. We will actively continue our privatization program. Measures to accommodate our forthcoming WTO accession will bring us closer to international competitive standards. Also on the agenda is the long overdue reform of our financial infrastructure, including lending institutions and other financial intermediaries. Now that trust has returned to the financial markets after the crisis of 1998, one of the main remaining problems is financial sector 'bottlenecks', which prevent capital from moving to the most profitable investment opportunities, especially in the processing sector of the economy. The Government and the new leadership of the Central Bank are committed to improving banking supervision, increasing the level of capital adequacy of banks and introducing greater competition in the financial sector, including through increased participation by foreign financial institutions. Over the next couple of years, a transition to international accounting standards will be completed - not only by banks but also by corporates. As we know very well, life is always running ahead of accounting practices. Taking into account the inventiveness of Russians, during the transition period we will try to eliminate at least some of our homegrown "cooking" tricks. The strategy of pension reform approved in 2001 envisages a stage-by-stage transformation of the existing pay-as-you-go system to a private investment based one. We believe that investment of pension money will reinvigorate our domestic capital market, making long-term capital available for productive investment. Another important task is to create an efficient mortgage market. We believe here that we can rely on advice and assistance from our American colleagues. Starting this year, the Government proposed that all Russian companies abide by a "code of corporate governance." What is encouraging is that Russian corporates are becoming increasingly aware that corporate misbehaviour ultimately leads to market discrimination. A great deal of attention is being devoted by the Government to protecting the rights of shareholders, including minority shareholders, safeguarding intellectual property rights and developing medium-sized and small businesses. As part of the judicial reform now under way, the resolution of commercial disputes will be simplified and accelerated. The main objective of all these steps is to put in place the most favorable operating conditions for businesses, both domestic and foreign. The result of this policy is clearly visible: as I have already mentioned, 2001 witnessed an appreciable growth in both internal and foreign direct investment. For the first time in recent years, we saw a new trend - Russian capital started to return from abroad on a massive scale. Despite the deterioration of the economic environment almost everywhere in 2001, Russia's GDP nonetheless grew by 5%. Moreover, the quality of growth has changed significantly, being now predominantly stimulated by the increase in domestic investment and consumption. Only all the reforms taken as a whole will make our economy attractive to increased investment and will support and reinvigorate the process of growth. We know what should be done and how we should do it, and we are firmly committed to implement what has been planned. Let me conclude with a standard formula: there is good news and there is bad news. I will start with the bad news. Many of you have already missed an extraordinary rally of Russian assets. Last year prices of our blue chips nearly doubled in US dollar terms - second to no other stock market in the world - and since the beginning of 2002 have increased more than an additional 50%. A similar trend occurred in Russia's foreign debt sector, where Russia restored its international credit rating to pre-crisis levels. But there is also good news - even the most popular Russian assets still look incredibly cheap by any standard or benchmark- not to mention numerous Russian investment opportunities which are currently not well known to the general investor community. With our joint effort, these opportunities can be exploited and not in the very long run. I wish you all a long and successful cooperation with Russia, which will only further strengthen the growing friendship and economic ties between our two great countries." Prime Minister Kasyanov's speech was exclusively offered to WINNE following a gala dinner for top executives of U.S. pension funds and portfolio managers. Note: WINNE cannot be held responsible for the content of unedited transcriptions.