Over the past five years the Russian economy has been demonstrating high growth rates. At the same time, factors influencing the dynamics of this development have changed repeatedly, with the devaluation of the ruble and an increase in the prices of export commodities playing the key role during the first stage. Nonetheless, the bulk of Russian enterprises, having learned to work in market conditions over the reform years, have made the most of their competitive advantage – Russian products have begun aggressively replacing imported goods, while Russian exports witness a rise in demand.

Many analysts have insisted that a weak ruble should be the basis for economic growth. That was one possible option for recovery. However, had such a strategy been pursued, it would have resulted in the preservation of the old economic structure, and in hindering programs which are intended for improving the living standards of the population.

Now that the ruble has been steadily strengthening or, I should say, has not been weakening, we are witnessing a significant growth in investment and a vigorous modernization of our production assets. Many Russian goods successfully compete on the domestic market with foreign goods in terms of their price and quality. It is noteworthy that investment now accounts for the major part of our economic growth.

Naturally, it would be wrong to say that we have fully utilized the potential for growth due to investment:

the economy has mostly been developing due to internal resources, while the inflow of external investment remains relatively low;

the huge savings of the population remain untapped. Macroeconomic stability and insurance of the citizens’ private deposits in commercial banks should become the key solutions to this problem;

the financial infrastructure ensuring investment flows between economic agents remains underdeveloped;

the shortage of investment targets due to the non-transparency of companies, the absence of in-depth credit histories and obscure ownership structures, present real problems. Potential investors simply cannot adequately assess their investment risks, hence the total amount of investors is limited. By 2007, all large and mid-sized Russian enterprises are to gradually shift to international accounting standards – this will be an important step toward resolving the investment problem.

Structural reform is closely related to attracting investment. However, Russia’s economy is not short of investment resources; rather, it is short of investment ideas. It is simply impossible for Russia to swallow a larger investment inflow than it has at present. An energetic structural reform could mend the situation.

The non-market sector should be reduced as much as possible. Unprofitable enterprises should inevitably fall under bankruptcy procedure; companies, fully or partially owned by the state, should not be provided with (often covert) preferences and benefits. These companies should eventually be privatized. Finally, it is necessary that we strengthen those efforts that are aimed at stimulating the emergence of competitive offshoots of the infrastructure monopolies.

Certain steps have already been taken in these areas. Bankruptcy procedure has been improved, and privatization continues. A lot has been done to streamline the infrastructure monopolies. As of today, the greatest progress has been made in reforming the energy sector and the railway transportation system. In the energy sector, restructuring of the national grid (Unified Energy Systems) will continue, while a step-by-step liberalization of energy prices will be implemented. The reform of railway transportation should create a competitive environment for independent commercial offshoots of the Russian Railways Co. to engage in various support activities.

Russia’s reform of the gas sector is ‘in the pipeline.’ In the next two to three years, state regulation of gas prices is to be replaced with the regulation of gas transport tariffs, while gas production and sales are to be liberalized.

Along with the reform of the infrastructure monopolies, it is necessary to exercise more effective control over economic concentration, since the promotion of fair market competition is one of the most important and undeniable functions of the state. To minimize any negative effects of that interference, this year the principles of anti-monopoly regulation will be reviewed. Mechanisms will be introduced for preventing abuses caused by a company’s domineering position on the market (currently, only control over the emergence of such a position is exercised).

At the same time, efforts should be made to improve the anti-monopoly regulation procedures, above all those which will facilitate market players’ applications for court hearings against breaches of legislation.

Fifteen years of market reform have already passed but, unfortunately, the list of structural anomalies in the Russian economy is still too long.

A favorable business climate, together with comfortable social conditions, can only be ensured by an effective state; this remains one of the most pressing challenges of our day. The state machinery in its current condition not only impedes business activities, but it ineffectively performs its social functions. It actually hinders the restructuring process which is direly needed by the nation. Unless administrative reform is accomplished without delay, Russia’s ongoing transition to a democratic and economically stable nation will be complicated.

The main guidelines for reform have already been determined. The reform efforts should focus on the reduction of state interference in business, the elimination of the overlapping functions of the state agencies and the delimitation of the powers and authority of the executive bodies. Finally, it must promote the emergence of self-regulating organizations which in the long run will take over certain regulating functions in the economic sphere.

The state is simply incapable of effectively monitoring all of the processes taking place in the economy, let alone regulating these processes. Such attempts cause excessive bureaucratic red-tape and an expansion of the state machinery, as well as the worsening of the administrative burden. Wherever possible, it would be reasonable to pass over the state’s functions to expert organizations, i.e. market players. But it is important to make sure that these organizations do not use their regulating functions as a tool for suppressing competition – they should work in the interests of the entire market. This year it will be necessary to hand over some of the state’s functions to self-regulating organizations, review the functions of the control and supervisory agencies in order to reduce their range, and further improve the licensing system.

Administrative reform has been launched. At the initial stage, 4,095 out of 5,318 state functions were analyzed, and 1,708 of these functions (42 percent) were found to be redundant, overlapping or requiring reduction in terms of the scope and sphere of their implementation. Approximately 20 percent of the redundant functions relate to essential spheres of economic life (licensing, the issuance of permits, out-of-court suspension of business activities, etc.). To review such functions would require, in particular:

making it possible to suspend an organization’s activities solely through the courts and only if there is a direct threat to the people’s life and health;

replacing, wherever possible, licensing with control over market players by self-regulating organizations;

stripping government agencies of their control functions (primary data collection, laboratory research and tests), with the state only retaining its supervisory functions.

The major state codes and approximately one hundred federal laws will have to be amended to make all of this possible. Part of the required legislation has already been drawn up.

In particular, draft laws have been formulated which call for stripping federal ministries of certain functions. These include the Ministry of the Interior (vehicular inspection), the Ministry of Finance (part of functions related to state regulation of auditing), and the Ministry of State Property (part of functions related to state regulation of real estate appraisal). A law has also been drafted on the handover of real estate inventory functions to the market.

The remaining functions of the executive will be divided among agencies so as to rule out conflicts of interests between them. This means that the sector now responsible for the establishment of rules will be separated from supervisory functions, as well as from service operations and the management of state property. This stage of administrative reform is to be completed within the first half of this year.

During the second half of the year, the remaining state functions will be analyzed in order to perfect the methods for their implementation, and bringing the financing of the state apparatus into line with the range of its functions and effectiveness. At the same time, there are plans for drawing up legislation on the general requirements for administrative regulations, as well as a framework law on the quality standards of state services.

While excessive interference of the state in the activities of the economic agents is being reduced, debates are now underway for the introduction of procedures for substantiating state interference in the economy in individual cases. In order for such a provision to be properly observed, a mechanism will have to be introduced for regular evaluation of the regulating measures, which could lead to the potential rejection of the state’s interference in certain cases.

An important characteristic of the state is the efficiency of its judicial system and law enforcement agencies. Unfortunately, the abuse of authority by police and prosecutors has provoked a serious setback in this state sector. It takes months or even years to complete even the simplest cases, making litigation costs inadmissibly high for average people and small businesses.

The judicial system should not be the means for the illegal appropriation of property rights. On the contrary, it should effectively protect those rights. In terms of economic diversification, particularly important is the protection of intellectual property rights. Therefore, reform should in the least be aimed at perfecting mechanisms for the protection of property rights, settlement of corporate conflicts, and arbitration.

Reform of the state governance system should be a top priority over the next few years. Naturally, this will require institutional restructuring in a broad range of critical economic spheres. These include, above all, tax reform, better oversight of natural resources and finances, as well as new measures for making the economy more transparent. I will not dwell in detail on these issues, since they have long been in the focus of debate by the experts. At this time, it is important that we give consideration to social security, education and health care, since these are spheres that are particularly significant for all citizens.

Presently, the quality of state-provided medical services is unsatisfactory, while the quality of public education leaves much to be desired. There has been a rise in ‘under-the-table’ transactions in these domains, while the personnel lack the necessary incentives for providing high-quality services. We must admit that the proclaimed principle of free education and medical services has not been observed in practice. Where it is observed, the quality of the services in most cases is impermissibly low.

By preserving this situation, we are not only reducing living standards, we are undermining the nation’s long-term competitive advantage – the high quality of its human capital. So, poor education and health services are not just a social problem – it is a direct challenge to Russia’s sustainable economic growth.

What measures need to be taken to improve the situation? The prescription remains the same – more freedom for the educational and medical institutions. Competition will do its work. The system of health insurance should work as an insurance system, rather than a system for financing the existing medical infrastructure. Higher educational institutions should be given the right, as well as learn, to legally make money through professional training. To make higher education more accessible, the state should provide guarantees for educational loans to every Russian citizen.

On the whole, I am positive about the prospects for Russia’s economic development in the coming years. Even if oil prices go down substantially, the growth rate of the Russian economy will not be negative. In the coming years, economic growth will largely be promoted by ‘new’ companies formed in market conditions and targeted at exacting consumers. The state, for its part, should create the prerequisites and support such companies. To be able to make prudent and effective moves, the state should become more transparent for society and its goals should be serving the interests of society and the business community.