President’s Report

February 1, 2004

Dear CCI Friends and Supporters,

Great news on several fronts in Russia! But first some commentary regarding recent concerns on Russia's political front.

The Khodorkovsky case: Most western journalists still prefer to interpret the jailing of this oligarch as an authoritarian move by Putin, after which there will be a reduction of reforms and freedoms with all manner of sinister possibilities lurking in the future. I want to go on record saying that my predictions are completely in the opposite direction. This was a complicated and multi-factoral dilemma and, in my estimation, Putin had no other choice. Further, within three years, it will become abundantly clear that he made the right decision. If any other head of state were challenged by the same circumstances, she or he would react in a like manner. Hopefully the process would be a little less clumsy, but the motivation and end result would be similar.

Rolling back of reforms: I don't believe reforms will be rolled back. On the contrary, I believe we will see Putin pushing through additional reforms, which will guarantee order and stability, stimulate small business development, and begin to bring the country under the rule of law.

Putin having full control of the Duma: The result of this kind of political power depends on the character of the one who holds the power. It could be disastrous in the hands of an ignoble person. In the hands of a good man, it can further just and constructive causes. I believe we will see Putin using this new power for the good of all Russian people, not just the wealthy elite and privileged few.

More about each of these topics as we move into 2004. Meanwhile let's be grateful that Russia continues to pull out of indebtedness and disorder and gains respect around the world for putting her economic house in order under Putin's and Illarionov's guidance. Russians are doing better, business is in an upward swing, and the middle class is expanding - as evidenced by the country's economic performance during 2003.

Russia's gross domestic product (GDP) grew 8.2 percent in 2003, according to data provided by Russia's Economic Development and Trade Ministry (statistics that no one is questioning). Industrial output rose 7 percent, against 3.7 percent for 2002. Inflation stood at 12 percent, down from 15.1 percent in 2002. Capital investments in Russia's economy increased by 14.5 percent, compared to 3.2 percent at end of 2002. Net capitol outflow was $2.9 billion - a spectacular decrease, compared with $8.1 billion in 2002. No outflow was registered in the second and fourth quarters. On the contrary, there was a net inflow of overseas capital for the year of $3.6 billion.

Standard & Poor's (S&P) raised Russia's international rating to the top speculative grade level and domestic debt to the lowest investment grade level. Russia's foreign currency rating rose from BB to BB+. This comes just five years after Russia's 1998 financial crisis with default of $40 billion on its domestic bonds. Moody's Investors Service upgraded both Russia's international and domestic ratings to investment grade. S&P further reported that Russia's government debt fell to 38 percent of GDP by the end of 2003, from more than 110 percent four years ago. Favorable oil prices, coupled with a better performing economy, have assisted this increase in economic stability.

World Bank President, Jim Wolfensohn, said recently at the Davos World Economic Forum that Russia had made substantial progress in 2003 and that he sees the next two years as an extremely significant period for Russia. He said the main problems facing Russia are developing additional economic sectors and job generation. In Wolfensohn's opinion, Russia should concentrate on regional development, create credit sources (for loans), and simplify registration and administrative business procedures - thereby reducing interference from bureaucratic pressure (public corruption).

Russia's Presidential economic advisor, Andrei Illarionov, acknowledged that Russia is no longer getting attention at the prestigious Davos World Economic Forum, and he sees this as good, saying it indicates that Russia is a more normal country. Typical of Illarionov's modest nature, he then remarked, "The more criticism the better. This makes it easy for us to see our mistakes, which is basically the purpose of the Forum."

According to Putin, Russia is beginning preparations for a new stage of reforms. His goals are "a substantial acceleration of economic growth, intensification of the fight against poverty, and improvement of the infrastructure - above all the social infrastructure." Putin intends to "continue refining Russia's economic institutions, budget policy, financial markets, and banking sector and to promote the development of the private sector and small and medium-sized business."

It remains to be seen how much the cooling of relations in the West will affect Russia's psyche. Let us hope that we don't enter into another period of confrontation. The wiser course is to wait and see if, in truth, Putin turns into an autocrat - rather than damning him before it's even known what will happen. In any case, there is nothing we can do in the interim to change Russia's internal dynamics. Over 80 percent of the population will vote for President Putin in the March 2004 elections. They have felt the changes in the country since he took power, they believe in his policies and his good will - foreign forces will not be able to change this, even with a campaign to detract from his accomplishments.

I am becoming very concerned about stirring up the winds of misinterpretation and suspicion toward Russia and their combined impact on public opinion. The next step could be "enemy making." We have been there before and should see the wisdom of not going there again.

I welcome your comments, both agreeing and disagreeing. Please email me at sharon@ccisf.org.

With best wishes,

Sharon Tennison
President