In less than four years, Russia has undergone an astonishing sea change. Macroeconomic stabilization is but the start. Underlying the economy’s rapid recovery is the emergence of a common set of fundamental political values. No one questions whether private property should be the basis of economic life. Tight monetary and fiscal policies are now de rigueur (until quite recently printing money to finance the budget deficit was widely considered acceptable). All major political forces (even of the left) support reducing taxes.
In short, the ideological vestiges of communist economics have been swept away. The achievement of broad political consensus means that institutional change can now become more purpose-oriented and consistent. Indeed, the consolidation of political parties has given Russia’s government a stable parliamentary majority for the first time since the postcommunist transition began.
But, unlike economic stabilization, near-universal rules do not apply to institutional reform. While there has been noticeable progress on the legal framework of the strategic plan that the government unveiled in 2000 (the so-called “Gref Program,” named after Economics Minister German Greff), a breakthrough has yet to be achieved. Of more than one hundred reforms planned for 2000- 2001, little more than a dozen were fully implemented.
Many in Russia now seek to accelerate the pace of reform by pursuing closer ties with the EU. Just as the global strategic realignment that has marked the war against terrorism led to quasi-membership for Russia in NATO, the attraction is mutual. The EU’s Common Strategy on Russia referred in 1999 to “the future establishment of an EU-RF free- trade area.” By 2001, the EU declared an even more ambitious goal: a Common European Economic Area based on gradual approximation of EU legislation and standards. Romano Prodi’s declaration last week that Russia was now a fully-fledged “market economy” is a step toward this cooperative notion.
A common economic area with the EU promises to provide fundamental institutional guidelines for Russia’s socioeconomic transformation – a blueprint of postcommunist reform that has driven reforms in the former Soviet bloc countries of Central and Eastern Europe. For the first time since communism’s collapse, Russia can formulate its own long-term development path – one with defined criteria for appraising policy decisions.
Adapting European standards to Russian conditions can now be viewed as a set of medium-term strategic targets – institutional objectives to be achieved within the next 10-15 years. These targets are increasingly compatible with Russia’s social and economic development, as well as its strategic rapprochement with the West. The level of educational attainment, the evolution of the political system, and the structure of GDP make the choice of European standards the most natural and appropriate.
But several caveats are in order. First, the use of EU institutional criteria must not be confused with the goal of EU accession. The latter is a political issue, and Russian society is not yet ready to discuss it. Russia needs standards that are developed in Russia and for Russia, not a set of mechanical rules implemented under the control of European entities. The idea is that Russia should determine its own targets and goals rather than formalize its desire to join the EU.
Second, and related to the first caveat, there should be no formal approximation to EU institutions when this would impair Russia’s competitive advantages. Indeed, reforms of the past few years have already put Russia ahead of the EU in several areas, including tax legislation, fiscal policy (which aims at balanced budgets), and labor rules. Russia’s agricultural policy is similarly more efficiency-oriented than that of the EU.
Third, the legal and technical parameters of the proposed Common European Economic Area remain vague. More work is needed to develop detailed targets for Russia. But a precedent exists: the European Economic Area (EEA), which incorporates EU countries along with Norway, Iceland, and Liechtenstein. EEA membership implies a common market and substantial progress towards legislative harmonization with the EU, but it does not envisage establishment of supranational bodies (except for a dispute resolution mechanism).
Adaptation of the EU’s economic criteria should focus on the following areas:
existence of a functioning market economy; effective competition and operation of market forces; structural reforms aimed at establishing secure property rights, meaningful bankruptcy legislation, an efficient tax system, and a stable financial sector; monetary and fiscal policies that promote sustainable growth; establishment of strong administrative and regulatory institutions.
None of this, of course, will happen overnight. Nor is it realistic to believe that Russia will come close anytime soon to meeting the EU’s Maastricht criteria for macroeconomic performance. Russia’s fiscal balance has improved dramatically over the last two years, but the rapid economic growth and moderate currency depreciation that Russia needs to catch up with Europe will keep inflation higher than the Maastricht ceiling. Higher inflation invariably means that long-term interest rates will also exceed EU limits.
But establishment of a Common European Economic Area to include Russia would make plausible a scenario unthinkable only four years ago. Russia can now aim for a position in Europe that resembles the current partnership between the EU and Norway. This scenario will become even more plausible following Russia’s admission to the WTO. Russia does not need to join the EU to create institutions worthy of Europe.
Vladimir Mau is the director of the Russian Academy of National Economy and co-author (with Irina Starodubrovskaia) of The Challenge of Revolution.
