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LUNCHEON SPEAKER GERMAN O. GREF, RUSSIAN MINISTER OF ECONOMIC DEVELOPMENT AND TRADE

FOR IMMEDIATE RELEASE April 3, 2001

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MR. GREF [Interpreted from Russian]: I ask you to forgive me for speaking in Russian. I know it inconvenient for you, but, unfortunately, my English is not good enough. But I'll improve, I hope. When investments in Russia will exceed a few tens of billions of dollars, I promise you that I will speak pure English here.

Ladies and gentlemen, your excellencies, I am very grateful for having this opportunity and this honor to speak here today, and perhaps this is one of the few opportunities that I will have to speak before such a high audience.

I would like to start by expressing my gratitude to Ex-Im Bank and personally Mr. Harmon for what they have done in Russia over the past few years. We value very highly what Ex-Im Bank has been doing in Russia, all its activities there, and when the subject came up of our getting an invitation to come here and participate in the annual council meeting of the Export-Import Bank, obviously there was no question that we accepted with gratitude. And taking this opportunity, I would like to say a few words about the vision of Russia, of what we have accomplished to date, and our vision of the future of Russia and how we view the future of Russian-American relations.

The year 2000 was a successful year for Russia, the most successful year in the economic sense, for the past decade. The GDP has grown 7.7 percent, and the growth of investment was 17.4 percent. The production has been increasing in all sectors of the economy. The best rate of the growth of production was light industry and machine building.

Thus, together with the growth in the production--in the increase of GDP, the structure of GDP has also improved. The share of those sectors that have the highest added value has increased. The investment potential, the investment demand has also grown in the past year. I would say right now that one of the cliches in the media of how to evaluate the growth is the high prices of energy resources in present-day markets.

But I would say that this is not quite the right explanation for the growth. As a matter of fact, the energy sector did not grow as fast, at such a high rate as some of the other sectors of the economy, such as light industry, machine building, and even agriculture. In fact, the agricultural sector has become profitable for the first time in many years, and the number of agricultural enterprises that suffered losses is now less than 40 percent. Against this background of economic growth last year, we have also had very significant changes in our social structure, the structure of consumption has changed. The pensions have grown by 38 percent in real money, and the earnings, salaries have grown by about 15 percent. The positive balance is about $61 billion, and the central bank reserve is over $28 billion. Forty percentage points to 14 percent was the lowering of the unemployment rate, and we have every reason to believe that the growth that has started last year will continue.

This trend can be discerned this year as well if you analyze the first three months of 2001. We are planning to reduce the economic growth because of various investments that are being planned for various sectors of the industry, and this, of course, will bring about a lowering of the growth rate.

We feel that for two or three years the rate of growth will be slowing down. We have planned for this year a growth of 4 percent, and then if everything goes according to the plan that we have elaborated, then gradually by 2010 this growth rate will increase to about 5 percent.

I would like to talk to you about a few key areas, key points that also are perceived as a certain type of cliche among the business community as an indication of especially if you look at the media without really analyzing what is happening. One of them is the results of what the government has been doing over the past year.

Last year, we were able to implement various tax innovations that we had planned, most of them. Four categories of taxes have been changed, and they constitute about 60 percent of all the taxes that the government takes in. The general lowering of taxes is about 2 percent, and a number of very radical steps have been taken.

First of all, we have lowered the income tax rate to 13 percent, from 30 percent highest to 13 percent--in other words, by a factor more than 2.

We have also lowered the tax rates for taxes that the labor fund has been taxed with by 3 percent, and also the scale of taxes for the labor--the salary fund. Depending on the threshold, the regression was 35 to 2 percent, depending on the income tax bracket.

And in conjunction with this reform, we have also changed our policy as far as customs duties are concerned, which will be conducive to Russia joining the WTO eventually, and we have revised our customs duty policy in that connection.

From thirteen and a half thousand tariffs, among those we have lowered and unified nine and a half thousand categories. Such a high volume reform for customs duties has never been undertaken in Russia previously, and, of course, we hoped by implementing this reform, two main purposes: one is to lay the foundation of opening of markets in anticipation of joining WTO, and instead of five categories of tariffs, we now have three rates. And the important thing is that we unified the customs tariffs. This was a controversial reform. Also, the unification of tariffs was also a controversial measure, and what I mean by unification is that certain items, customs items, which are very difficult to distinguish at border crossing points, we have unified them and conglomerated them into one item for customs purposes.

For example, fowl and meat constituted six different items. In other words, we distinguished between chicken, turkey, et cetera. And they might have differed as much as a factor of four. Turkey meat, for example, was 5 percent customs duty and others were 2 percent. And, of course, customs statistics indicated that Russia had no imports of chicken, for example, into the country, and 97 percent of imports were actually--was turkey meat, although the whole country was eating bush legs, as we call them. This is a cliche that we have had ever since the beginning of the 1990s, the early 1990s, when there were lots of chicken parts that came into Russia at that time, and for some reason they got called, once and for all, bush legs. And they continue to be called that ever since then. And this constituted quite a high volume of imports. So we still get a lot of chicken imported, but according to statistics, it's turkey.

So this is just an example of how the unification of tariffs or various items under one tariff rate has led in the case of meat and fowl. All meat is subject to the same customs duty. And this is only an example. There are dozens of examples of that kind.

The results of these innovations are interesting, and they are interesting as well for the American administration representatives, and we talked about it yesterday. I know that President Bush has already come out with an initiative of lowering virtually most items. And we know that the officials in the United States are worried about how this is going to influence the budget, so as far as we're concerned, when we lowered income tax from 30 to 13 percent, it has brought about the fact that over the first three months of 2001, compared to the three months of the previous year, the increase of income along this item was 70 percent.

The regressive scale of income tax that I have mentioned has meant that the income has grown by 30 percent over the first three months of this year. The income from customs duties collected has increased by more than 20 percent. In other words, we have definitely an indication that there is a social compact coming into existence between the administration and the consumers, the society, so that it means that people are declaring all their income, are beginning to faithfully pay their taxes. And that is a very important indication, a very important symptom of society in general and Russian society in particular.

As a result of the measures that we have taken last year, we have adopted a number of laws which are directed towards fighting corruption. The system of pake(?), distribution of state resources, and the system of taxation that was discriminating against certain types of businesses that existed in the past and also certain categories of the population as a whole, there were entire categories of population that never paid taxes at all. For example, all the military personnel were exempted from taxes. All the workers of the justice system, the tax--police personnel were exempt from taxes, and judges who actually judged people or convicted people for not paying taxes were themselves exempt from taxes.

So all of this, of course, once we have implemented these reforms, has now corrected the situation and has now presented a completely different macroeconomic situation and has now created a completely different kind of economic space for conducting business in Russia. You know that over the past year there was a huge problem of non-monetary transactions, non-monetary payments, barter-type of arrangements. Last year, the share of monetary transactions, monetary spending in Russia finally reached 80 percent of all transactions, so that there is now demand for monetary liquidity in the country.

This year, we are continuing a second step, a second phase of the tax reform. We have already introduced a bill revising taxes on profits, and once this law is passed--we hope that it's passed next January--it will lead to a lowering of tax pressure upon businesses significantly. And we are also eliminating taxes. There were dozens of taxes which were very difficult to administer and which created great obstacles for businesses and were totally useless from the financial point of view and simply created more paperwork. And we are now streamlining this whole system and changing it to a very simple and efficiently administered system of taxation for businesses.

We are now going to direct laws, and we are trying to get away from administrative acts. We are also planning this year to adopt a law on rent royalties and rental taxes and taxes on production-sharing arrangements. And this is going to be the second phase of our tax reform which should complete the reform by passing the laws that I just mentioned.

One of the things that interferes with the business climate significantly in our country is the legal imperfections that exist. There are certain laws that contradict each other, and so we have conducted a federal reform, legal reform last year, and we introduced the institution of president's representatives in seven federal districts. The governors are no longer part of the upper chamber of the government, and, thus, we have a vertical executive branch now.

The status of the upper house of the government, the inviolability for one of the most key links in the executive branch of the government, of course, allowed often without prosecution to abuse their power. Now we have done away with this. We have one single vertical executive, and last year, we have eliminated over 3,000 acts of--subjects of the Federation which are in contradiction to federal laws of the Russian Federation. We also have instituted a system where signals can pass vertically from the very top to the very bottom, and I have been asked often what kind of market are we dealing with. Are we dealing with a market that serves 145 million people, or are we dealing with 80 different markets, each constituting about five or six million?

Today, I can answer the question quite clearly: Yes, today you are going to be dealing with one single market, 145 million people, which is going to be subject to the same laws.

Another very important factor is the Russian bureaucracy. So under personal control and under personal supervision of the President, and with his personal pressure, a packet of laws is now being considered on democratization of the bureaucracy in the Duma. We are proposing that license type of activity be reduced from 2,000 to 100 to limit the number of agencies that are going to be checking the various enterprises and limit the right to do so no more often than once every two years. And they have to notify these enterprises within five days of such inspections.

We have a law on the table to streamline the legal proceedings and to make them effective and efficient. One of the priority areas is strengthening the judicial system and to implement judicial reform. Right now we have a situation in Russia where all judges and all the jurists are elected for life in Russia. And in trying to create an independent judicial system, we have, unfortunately, made it independent of those whose rights it is supposed to protect, have created a sufficiently inefficient and closed-circuit, opaque judicial mechanism, as it were. And so now we are trying to implement a whole number of measures that will make rotation of judicial personnel compulsory, make the work of the judicial system more transparent, and will change the norms of the judicial process more efficient so that the individual citizens can have better access to the courts and have their rights better protected.

We also want to implement this year land reform, and we are going to introduce the necessary law in the Duma. We will remove--this will have to do with the land, all the land except for the agricultural lands, which will have a separate law dealing with that aspect.

There is a whole series of laws that will deal with the life of the citizens. We hope that with the support of our trade partners, our key trade partners, such as the United States, we will be able to resolve the problem of trade, to open Russia, open access to Russia and to Russian markets of import products, import commodities, and have non-discriminatory access for our key trade partners in Russia. This is vitally important for Russia because of a whole series of commodities that we produce that are competitive. There is not enough domestic demand for these commodities, and, therefore, we have to have access to international markets for these commodities.

Unfortunately, there are many among our foreign partners who do not view Russia as a full-fledged partner, and our most important appeal, therefore, to the representatives of the American administration today is to please note that Russia is ready today to become a full-fledged trade partner. And the only kind of aid that we still need is the assistance in viewing Russia as a full-fledged partner, equal partner, because any other way of viewing it is simply no more legitimate. Unfortunately, in the United States as well, Russia is viewed as a country with non-market economy, and as a result of the antidumping investigations, Russia has no right to protect its rights and has to prove that it has no subsidies in its economic structures because, according to the rules that exist, the structure of cost simply is not taken into account.

I think that the future of Russian-American relations is precisely in changing this state of affairs and view Russia as a potential partner, equal partner, which is ready to have frank and sincere and open dialogue and which is responsible and able to answer for its actions.

One more point that I would like to mention. We see as one of our main tasks the building of a civil society which trusts the government. And the dialogue between business and society is a key element of such a society. And such a society can only be built by a responsible government conducting an open policy, a government which is building reforms and which is conducting it with clean hands.

We realize that to be able to build this perception, to create this image for ourselves, will be difficult and it will take time. But we do not appeal to you to believe our words, but to please watch what we do. And those who follow the development of the situation in Russia and who follow the activities of the Russian Government can draw his own conclusions as to the actions and the intentions of the Government of Russia.

I would say that Russia a year ago and Russia today are two different states. There is an enormous number of problems that we still have, that we are still facing in both the economic and the social sphere, and they will require enormous efforts on our part for more than one and even more than five years to come. But I would like to tell you that the principles which I have stated here are principles that our government and President Putin is implementing in practice. They constitute his own convictions, and he will continue to implement these principles, regardless of what happens.

And I would like you to know and to understand that you are regarded by Russia as friends, and, please, I would like you to view Russia as your friend. America has always been and will remain the main trading partner for Russia. As far as the volume of investments accumulated, America is country number one. And in our foreign economic policy, the relations with the United States and with American investors will always be viewed as priority relations.

I would like to conclude my remarks with this and to once again thank the Export-Import Bank and its President for having given me this opportunity and to express their hope that in the future the Export-Import Bank will not just have lost only 1 percent in Russia, but will profit so much that it will compensate the losses in all the other countries for the Export-Import Bank against the falling market of the United States.

Thank you very much.