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Verbatim report of proceedings
Thursday, 16 September 1999 - Strasbourg OJ edition

7. Financial crisis in Russia
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  President. – The next item is the Commission’s statement on the financial crisis in Russia.

Mr Kinnock, speaking on behalf of the Commission, will be the first to take the floor.

 
  
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  Kinnock, Neil Commission. – Mr President, with your permission, I would like to make a Commission statement on the effects of the financial crisis in Russia and on matters relating to corruption and money laundering. As the House will know, some stability has been achieved in the general financial situation in Russia since the dramatic fall in the international exchange value of the rouble in August last year. Indeed, since the beginning of this year, there has been some encouraging news with the recovery in industrial output, mainly as the result of import substitution, relatively tight controls on inflation and a stronger balance of payments position, produced mainly by a sharp rise in the price of Russia’s oil exports.

In addition, at the end of July, agreement was reached with the IMF, and other financial institutions, on the resumption of direct loan assistance, and soon afterwards there was an agreement in the Paris Club on rescheduling debt service payments due on Russia’s sovereign debt. Talks are now under way in the London club of private-sector creditors. The Russian economy has consequently gained a breathing space in the run-up to the duma elections in December and the presidential elections next summer.

However, by itself, none of this is enough to revive an economy which remains very fragile with rising unemployment and levels of poverty. Much more effort is therefore needed from the responsible authorities to promote sustained recovery over the medium-term. Adoption by the duma of the budget proposed by the government for the year 2000 will be a significant test. In addition to severe structural problems like lack of investment, the public debt, particularly foreign debt, has grown rapidly and at present it is not clear how the authorities intend to service that debt burden.

With reference to the more specific issues of the flight of capital and money-laundering, I would like to say the following. The Commission is aware of the current media speculation and the growing worries about the misuse of international assistance funds provided to Russia. Clearly we must await the outcome of ongoing investigations in Europe and the United States of America, and the Commission is naturally following the matter closely.

In the meantime, the decision about a response to the speculations and the allegations about misuse of assistance funds is primarily a matter for the IMF, the World Bank and the G7 countries, since they are obviously the main suppliers of direct financial assistance. Everyone should of course be mindful of the fact that the Russian authorities are responsible for repaying the principal and the interest due on such assistance. Moreover, the latest IMF assistance will be cancelled out by debt-servicing payments due to the IMF by Russia. It will therefore be a book transaction without any substantial transfer of money.

Meanwhile Community assistance is, as this House will know, primarily delivered through the TACIS programme which is centrally managed from Brussels. The funds concerned are predominantly used to pay EU firms to provide technical expertise and advice for Russia. Only a very small proportion of the funds therefore goes to Russia. Indeed it is only EUR 4 million out of the total of EUR 140 million. That EUR 4 million is obviously directly managed by our representation in Moscow.

In addition the Community food supply programme for Russia, that was launched earlier this year, is subject to very close monitoring which involves, amongst other things, checks on the use of the funds generated by the sale of relevant food products on local markets. Moreover, Russia does not currently receive Community loans, and the lending mandate of the European Investment Bank for countries outside the European Union does not extend to Russia.

However, the issues which deserve close attention are not confined to alleged misuse of international funds. They extend, in the Commission’s view, to the massive outflow of capital from Russia which has in turn obviously contributed to the low level of internal investment and therefore impeded economic growth. The Commission has always made it clear to Russia that reversing capital flight urgently and fundamentally requires a more appropriate investment environment and better protection of investor rights in Russia.

For some time, the Commission has recognised the link between capital flight and corruption and criminality in Russia and we also understand the cumulative threat these conditions pose to the country’s transition to a democratic system and a market economy governed by the rule of law. The House will be aware that criminal activity thrives on institutional weaknesses and the fragility of efforts to consolidate the rule of law. That is why the Commission has made, and will continue to make, useful efforts to assist Russia in its arduous transition by actions like targeting technical assistance at combating money-laundering and organised crime and supporting efforts to advance the rule of law in general. One example of such activities is a study into Russian institutional and regulatory requirements in combating money-laundering that will be launched later this year.

There is also growing cooperation between the relevant Commission and Russian officials in customs and anti-fraud activities. The House will be only too aware of the sophisticated skills of international criminals in taking advantage of different legal and regulatory provisions across the globe and infiltrating economic and financial systems regardless of national frontiers. We are therefore faced with a worldwide problem that is not confined to Russia. Obviously combating it requires closely coordinated international responses and the Commission is ready to play its full part in that.

Russia must nevertheless take whatever action it can to put its own house in order. The Commission therefore hopes that the Russian authorities will respond to the present situation in a convincing way and it is vital that those authorities cooperate fully with the ongoing investigations in Europe and in the USA. The Commission notes with approval that the authorities have decided to send a high-level mission to the USA to liaise with investigators there, I think that is actually happening at the present time. Clearly the internal investigations in Russia into these fraud allegations should be actively encouraged.

The Commission is concerned, however, that the questions raised have been met by only routine denials and have not been properly addressed in Russia. Against that background, timely action by President Yeltsin in signing into law the Russian draft legislation on money laundering would be reassuring to the international community. Ratification and implementation of the relevant Council of Europe Convention is also essential.

In addition, the Commission would like to see a speedy resolution of the problems in the Russian banking system, which is obviously at the centre of concerns about corruption. Confidence in that system needs to be restored quickly and decisively as a major contribution to the achievement of something like normality.

 
  
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  Swoboda (PSE).(DE) Mr President, I do not want to interrupt the debate, but since this debate and statement by Commissioner Kinnock are due to an urgent request by a number of Groups, I should like to ask you also to pass on to the Conference of Presidents the wish that these Groups might therefore ensure that at least a minimum of Members of Parliament is present. I find it shameful, in fact, that a statement on an important question is being made here and yet so few Members of Parliament are present.

 
  
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  President. – I must admit it would have been nice to have seen more people here today. I shall see to it that your request is conveyed to the Conference of Presidents.

 
  
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  Provan (PPE). – Mr President, can I associate myself with Mr Swoboda’s remarks. I had not intended to speak in this debate but I have listened to a very carefully prepared statement from the Commission and I thank Mr Kinnock for that. It correctly sums up what I believe is a very dangerous situation developing in Russia.

What we need at the moment is stability and further investment to allow Russia to develop. What is happening is the exact opposite. I was in Moscow last November with a group from this Parliament which had gone there to evaluate the need for humanitarian aid, and it became obvious that the country is just not able to put itself in order. We as a European Union really do need to take some political initiative to try to help the Russians get their economy back on track.

The Central and Eastern European countries that were former members of the Soviet bloc have been able to pull themselves together, and improve their economies and their peoples’ standards of living. This was because we put ownership and the laws of property ownership high on the agenda. That is not the case in Russia and the difficulty there, I believe, arises because no one has the responsibility to own anything and therefore take control of their own economy. I hope we can therefore take some sort of political initiative to try to make sure that country puts its basic law into proper order.

 
  
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  Paasilinna (PSE).(FI) Mr President, ladies and gentlemen, we perhaps have to remind ourselves that much has happened in Russia: over 5 000 nuclear warheads have been withdrawn from use, democratic institutions have been created, and the media there may criticise the government, and, in fact, dare to. It is true the media is more and more passing into the hands of the few, the very people who, as the previous speaker reminded us, have acquired common property for themselves. At the same time, however, we must remember that Russia’s leaders are primarily and directly responsible to their own people, the Russians themselves.

I would like to raise the issue of this ruthless campaign of terror and bombing – the most recent explosion took place yesterday evening. The intention of this action is to create instability in the whole area, for the whole vast region, and it is happening at a very awkward time. Russia has two elections in the near future, the situation is very tense, the country has a sick president, and the whole economy is in difficulties. We must condemn, as we are now doing, those states that are aiding the terrorists in their aim to create new instability in a region where there is enough of it as it is.

We should not speak of a financial crisis in Russia, however. Russia has a political crisis, and that has continued since the country changed direction. We can certainly see the reasons for this political crisis, but the situation will not be remedied with money, however much of it you heap on Russia. We have seen how things go with money: they go fairly badly.

With regard to the West, I would really like to bring up another issue. We still have no clear policy on Russia, although we have a bulky agreement on partnership and co-operation. We have practised collaboration in many ways and we support democracy and civil society in Russia, but, for all that, we do not understand Russia. One reason for that is, in practice, we do not know the Russian politicians very well. We have concentrated on one person, or one body of people, in fact, on one narrow group of people in power. As a consequence, what happens in Russia always takes us by surprise. We should therefore broaden the scope of our political contact with Russia, and, this would help us to understand the changes that take place there so unexpectedly.

We know that our financial aid and food aid have pretty much slipped into the hands of those for whom it was not intended. It is the Russian elite that are guilty of this, a group we have had no hold on. I think we should discover how, for example, the competition for transporting food aid granted to Russia by Europe was organised. I perceived problems there, and I would ask the Commission to give an explanation of this affair. In this situation, however, it is necessary to increase co-operation with Russia, and not terminate it. The Northern Dimension, medical care, the Nordic regions, etc, will all be important. Now Russia needs from us very concrete proposals on co-operation, and that is why I regard the aspect of the Northern Dimension as so important, and I hope the Commission will act.

 
  
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  Väyrynen (ELDR).(FI) Mr President, this time we are discussing Russia’s financial crisis. It is just one of those serious inter-related problems, or crises, Russia is struggling against at the same time. These problems have one sole cause: the political crisis. In this I am in full agreement with the view of Mr Paasilinna. Since the collapse of the socialist system, Russia has had no viable political system. The parliamentary elections organised for the end of this year and the presidential elections next year may create a basis for solving the political crisis; at least we must hope they will.

The international community must be patient with Russia. As the political system and the main social institutions do not function properly, some of the aid to the country is getting wasted. Aid and assistance to Russia must, however, continue, but we have to learn from experience so that the operation may be as successful as possible. The European Union must strive to ensure in particular that Russia can develop a workable democratic system for itself, with viable social and economic institutions. To assist the operation it would be of value to establish regionally and locally based contact and co-operation between the countries of the EU and Russia. This would provide, on a massive scale, a context for providing Russia with the social and economic know-how the country badly needs. There are particularly favourable opportunities for this in border areas between the EU and Russia, as the bilateral agreement on co-operation in neighbouring areas made between Finland and Russia at the start of the 1990s shows.

Unfortunately, there have been difficulties in communication between the European Parliament and the Duma. The meeting of the parliamentary Committee on Development and Co-operation planned for this autumn has been postponed. We must hope that it will be organised again as soon as possible. The Committee on Development and Co-operation has grown, and it has many new members from our group. For this reason, we should make our work more effective to increase, for example, the knowledge our members have of Russia. It might still be appropriate to hold a seminar this autumn, one in which we could acquire more expert knowledge on economic and social conditions in Russia. In addition, we need a monitoring committee to help members to keep their knowledge of Russia continuously up to date.

Mr President, in my opinion, the Commission’s report was well-informed and valid, and I believe that the Commission will attend to the issue of the economic crisis in Russia and matters generally connected with Russian relations.

 
  
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  Lambert (Verts/ALE). – Mr President, the news that we are seeing at the moment alleging misconduct by the Russian Central Bank comes as very little surprise to many of us. It has long been evident that the large sums of money provided to prop up the national level of the Russian economy have not produced the desired effect and that the top-down approach might have appeared simple, but it can be less efficient in the long term.

We are aware that the gap between rich and poor has become a chasm, that the people of Russia are losing faith in the ideal of democracy and that the infrastructure is crumbling and workers are not paid. The West might have done better to have paid the teachers, doctors and miners directly, perhaps. If we are to invest further in the Russian economy we have to find the means to support and develop local economic activity - as our colleague has just said - which meets people’s needs and provides a sense of stability and involvement. There are many examples of that being developed in areas of social exclusion in the world’s poorer countries at the moment, from which we can learn.

The emphasis on money laundering and crime is only part of the issue. We need to look at how to develop internal investment. The example from the West is that you bring in other people to do the investing and they take the cash with them. So perhaps we would do well in this House to look at how we talk about issues such as the repatriation of profit to countries producing it, rather than simply extracting the cash as well as the natural resources.

 
  
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  Seppänen (GUE/NGL).(FI) Mr President, the European Commission has now woken up to the fact that the aid and assistance granted to Russia is being abused. However, it has been abused for ten years now, and this is how the basic structures of Russian society have been destroyed. Aid has been both used wrongly and granted wrongly. We in the European Union have granted it in the wrong way. Corruption is a fine word for what has happened. The whole of the upper stratum of society is party to this corruption. In this we cannot trust the president, his family, the government ministers, or even the central bank. It is unbelievable that the central bank has recycled the aid granted it by the IMF through companies that merely exist on paper on the tax evaders’ isle of Jersey. We just speak of corruption, but we do not say directly that this is a matter of criminal activity. The reason for this criminal activity has also been the aid granted by the West. The West has given aid for the wrong reasons.

A typical example is the relief aid granted to Russia last winter in the form of food aid. It was meant to help Russia to escape a winter of starvation and survive the sub-zero temperatures at the beginning of the year. But this aid has not yet reached its destination. We gave Russia relief aid in the form of food to cover the time of the winter frosts, and that food is still on its way to Russia. That food is being sold in Russian shops, and thus the price of Russian agricultural produce and food is being caused to tumble, and farmers’ hopes of practising their own food production are being dashed. Above all, we must say, from the point of view of the taxpayers in the EU, that if we wanted to give Russia’s social sector aid equal to the cost of a pension we should have given it money, not food. Food aid was an agricultural policy, which cost us taxpayers a lot more than if a corresponding amount of social aid had been given in the form of money. With this in mind, the Commission, the Council and the European Parliament should look in the mirror and recognise their own mistakes. Aid has been used wrongly, but it has definitely been given wrongly.

 
  
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  Turchi (UEN).(IT) Mr President, ladies and gentlemen, at a time when we are declaring that, together with the new Commission, we must give a central role to the European Parliament, it is only natural that we should consider relaunching Parliament’s foreign policy at the same time.

The crisis in Russia gives us that opportunity. Indeed, at a time when the international community and the world press are emphasising the importance of the scandal taking place in Russia, we must take the initiatives necessary for understanding the gravity of this scandal, the explanations of the Russian Government regarding these accusations and our position with regard to the Community’s financial aid for Russia.

Of course, Commissioner Kinnock’s report is studied and significant, but above all we need to consider the political aspect of what is happening in Russia at the moment. In the near future, all this could destabilise international politics and also the Community’s trade relations with Russia itself, not to mention the serious consequences for the Community’s entrepreneurs who have invested in this country.

We must remember that the current scandals are rocking the Russian Nomenclature and institutional representatives. Moreover, the United States decided in Congress to launch an inquiry to ascertain the use of money given as financial aid to Russia and whether it has been used instead in an illegal way.

Having said this, the Community’s Institutions must, in my opinion, ask the competent Russian authorities to clarify how funds intended for the development of the country and for its food crisis were used.

The services of the Commission, which oversaw the aid to Russia, are drawing up a report on the way the funds were used. In short, they are requesting a committee of inquiry, made up of the Council, the Commission, the European Parliament, the EIB and the EBRD which will verify how much aid was sent to Russia, which funds were used and if it was spent in the planned way. Take the TACIS programme for example. Just yesterday, President Prodi referred to the concept of transparency in his Commission and at the same time, co-operation with the European Parliament.

If this is the first commitment, we must immediately clarify our relations with Russia and clarify the bilateral relations between the Community and the Russian Government. If we do all this, we will give our institution political significance and we will regain credibility in the eyes of the world.

 
  
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  Belder (EDD).(NL) Mr President, there continues to be one financial scandal after another in Russia. For example, today's Frankfurter Allgemeine Zeitung reports that last summer the Central Bank of Russia sold as much as USD 3.9 billion of an IMF credit destined for Moscow and USD 4.8 billion in total directly to Russian private banks. In so doing, it withdrew a huge quantity of roubles from the country’s public monetary dealings. And what is worse, those USD 3.9 billion of IMF money did not even go directly to Russia but were ultimately transferred through accounts in the United States.

The man behind this revelation is Skuratov, the Public Prosecutor, whom Yeltsin relieved of his office. Two salient comments are in order as regards this accusation. Firstly, Skuratov has only exposed a very small part of a practice which has been going on for years, and certainly at least since 1990, that is the systematic manipulation of international credits by the Central Bank of Russia.

Secondly, the International Monetary Fund and the American government, too, were informed about this abuse early on. Yet they took no action, under the pretext of the spurious, hence costly slogan: “Corruption is better than Communism”.

The fraudulent draining away of financial assistance provided by foreign countries, a Russian capital flight over the last ten years amounting to an estimated USD 150 to 300 billion, and a Russian economy which has largely slid back into a barter economy all make it difficult for us to gain a proper idea of the scale of the financial crisis in the Russian Federation.

As far as the European Union is concerned, it should always be the case that only real Russian projects which have been approved by independent experts should be considered for financial assistance, and only then on condition that careful follow-up supervision is undertaken on an annual basis.

 
  
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  Titley (PSE). – Mr President, I should like to begin by congratulating Commissioner Kinnock on his second term of office, which I am sure will be even more distinguished than his first.

In relation to this particular problem, while we must not underestimate the damage that crime and organised crime can do to Western society. It is important where Russia is concerned that we try to get beyond the headlines. After all, to be blunt, crime is a fairly normal occurrence throughout the history of Russia. There is nothing new about it. We must not forget that Russia is potentially an extremely rich country. It has huge natural resources from gold to oil to agricultural land, and yet production has gone down 50% since 1989. The key problem is capital flight, whether it is legal capital flight or illegal capital flight. After all, the money which stays in Russia, even if it is on the black market, has an economic effect. Capital outflow is now about USD 25 billion a year and yet foreign investment is less than USD 3 billion and falling. To be quite honest, if the Russians are not prepared to invest in Russia what chance is there that anybody else will do so? We must not lose sight of the fact that any public money we can give is a mere drop in the ocean. The key to Russia’s salvation is private investment. It is that area that we ought to focus on.

The answer lies within Russia itself. It has to implement proper economic reforms. We have to have a viable and fair taxation system. We have to guarantee modern democratic law and law enforcement.

Industrialists have made it clear to us – for example, in the EU/Russia industrialist round table – that they want to invest in Russia. After all, given the potential, there is a killing to be made in Russia with the right investment at the right time. But repeatedly they all say the same thing: it is corruption that discourages them, investment conditions are very poor because there is no viable long-term tax system, laws are constantly changing , the infrastructure is poor and, most importantly, property rights, including intellectual property rights, are weak and confused. Those are the areas we have to focus on.

I recognise that in the current atmosphere it is difficult to justify EU technical assistance but we must continue that process because of the importance Russia has for us for security reasons as well as economic reasons.

I am glad to hear what Commissioner Kinnock says because it is important that we focus on a few areas: not only economic improvement but clearly, what we also have to aim at, improvements to civil society which will underpin economic reform and the social aspects.

I would therefore like the new Commission – and I ask Commissioner Kinnock now – to make an overall evaluation of the efficiency of the TACIS programme and then to report back on how they will improve the programme for the year 2000 budget so we can have greater confidence when we vote in support of the TACIS programme.

 
  
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  Schroedter (Verts/ALE).(DE) Mr President, I too should like to congratulate Mr Kinnock on his new post. I hope for worthwhile and constructive dialogue with him over the next few years. As far as I am concerned, two basic questions arise from what Mr Titley has said. Russia, as we know, is suffering not only from financial crisis, but also, and above all, from the erosion of basic democratic mechanisms such as transparency, public supervision of the administration and an independent judiciary.

In a situation like that, how can the difficult process of social transformation take place at all? This is just what I have already been saying – our problem is that, in our action programme, we are setting false priorities for Russia. The democratic bases of the market economy must be operating before we can create a free trade area. On the other hand, it is evident that banks in the West have also been weak enough to permit money laundering and the mismanagement of money at an international level. How can it have been possible for the destination of international credits not to have been understood? How is it that money laundering on such a large scale is possible at all in the West? These questions are also waiting to be answered.

 
  
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  President. – Thank you to the Commissioner.

The debate on this agenda item is hereby closed.

 
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