Press Briefing by National Economic Advisor Gene Sperling


Office of the Press Secretary
(Moscow, Russia)

For Immediate Release June 4, 2000


The National Hotel
Moscow, Russia

10:08 P.M. (L)

MR. KENNEDY: Here to brief you on President Clinton and President Putin's economic session today is Gene Sperling, the Director of the President's National Economic Council. Thank you. Gene?

MR. SPERLING: The overwhelming portion of the second, larger session today between the two Presidents was on economic policy, both broad and very specific issues between them.

President Putin talked about the improvement in their economy, went through some of the statistics in terms of the strength of growth that they've had recently, but stressed that they were not stopping there; made a very strong case for his economic reform package, focusing on particularly the tax reform that was in front of the Duma, production sharing, different intellectual property issues.

He stressed both the capital flight problems and money laundering, stressing that both result in, obviously, capital leaving Russia, but stressing the different nature of the problems -- capital flight by Russian investors reflecting lack of confidence that needs to be repaired, while the money laundering reflected specific criminal activity that they also are seeking to address in the Duma.

He also, from there, talked about their efforts to re-engage in the IMF. They talked through the budget position, the debt burden that Russia still faces. The two Presidents also talked -- both some last night, I have heard, but then clearly today -- about the possibilities of Russia's efforts to accede to the WTO.

They talked very specifically on the bilateral investment treaty between the United States and Russia. On that, there was a bilateral investment treaty in 1992, which our Senate ratified, their Duma never ratified. Now the issue is whether or not we can make progress on that. They presented a paper to us. We made clear that we are willing to consider amendments in some limited areas, which would require it to then be ratified by the Duma. We would have to resubmit it to our Senate for ratification in that case.

So they had both a very broad discussion on the general issues of economic reform, on building economic confidence. The President talked about the similar situations he faced in his first year, in '93 -- the difficulty of getting things through in the first year, but the necessity of seeking to do your tough reforms in the first year, and the importance of changing a negative market perception, and how President Clinton felt the United States, in terms of the deficit and trade and other issues, that his actions in the first year were very helpful, though politically difficult, but that they paid off in the long run.

So, again, it was a conversation that was mixed with broad themes, and then at times very specific and detailed bilateral issues between our two countries, like the bilateral investment treaty and some other issues.

And since I know it's late, I will stop there, take any questions anybody might have.

Q What makes the President think that these reforms are actually going to -- if they get passed in the Duma, how would they be implemented and why would they work if they never worked --

MR. SPERLING: Well, I don't think that right now what you're looking at is so much a case where Russia has passed significant structural reforms since --

Q -- they did pass?

MR. SPERLING: No, no. What I'm saying is, this is not a case so much where there's been significant passage of structural reforms and then there has been a failure of implementation. There has been a failure at implementing the basic structural reforms in the beginning.

But you're absolutely right. This will take an all-out commitment on the implementation side. One thing that President Zedillo always said, when he talked to other leaders in terms of his experience with Mexico, is when you've had a negative perception, when people have lost money investing in your country, it's not good enough to just do the right thing -- you have to go the extra mile, you have to do a bit of repair on the negative perception.

And so I think people will be looking at what's going on in Russia, both in terms of what passes, structural reforms, both in implementation. But I think they'll also be looking for those symbolic efforts that will show that there is a change of course.

Obviously, the biggest problem in capital flight in Russia has never been foreign capital flight. It has always been domestic capital flight. And I think that for the new Russian government they are going to be able to, first, re-engage successfully with IMF; second, successfully pass some of these new structural reforms.

And these structural reforms, in a sense, are very basic. Anybody in this room probably invests money at times, and the question is, when you invest in the United States, you may think about whether you think the stock market is valued right, you may think about whether it's a good bet. You don't worry that you somehow might not have your rights protected in a shareholder dispute or in a bankruptcy or in a contract. These are basic rule-of-law issues of which one feels secure in a place like the United States.

Russia is a place where there is enormous intellectual capital, very highly trained scientists, people -- in that sense, an attractive place for investment. But the failure to develop these structural market mechanisms that are very tied into the rule of law has kept people from feeling that this is the type of business investment climate that they want. So you really have to have both the new reformed and stronger budget situation, structural reforms. And yes, you're going to need the type of implementation and examples that make people look twice, think again.

The President -- they talked about the fact that Bob Strauss was going to bring some CEOs to look, but clearly people are going to be affected not by talk, but by action.

Q Gene, this isn't going to happen overnight. Did they put any kind of timetable on when this was going to come about, if at all?

MR. SPERLING: I think probably the most immediate thing they have before the Duma is the tax reform. And the way the Russian system works is, you have to pass tax law six months in advance before it's implemented. So they're not on a fiscal year like we are, they're on a calendar year. So if you're counting on new revenues coming in at the start of the next calendar year, you want to pass your tax reform over the summer. I mean, the core of their tax reform is obviously that they have very significant exceptions, low compliance. And the question is, can you simplify, actually lower rates, but broaden the base, pick up more? There are some efforts to federalize things like the inheritance tax, they have an excise tax on high octane gasoline. And I'm sure, just like with our Congress, they have a flat tax, which here as well as back in the United States has its critics. But I'm sure that here as there, it will go through some controversy in the Duma.

The question is whether they will pass something that meets these general principles. I think that is something that is very much alive. I think the other issues are some of the more rule-of-law issues -- bankruptcy, intellectual property, customs codes, some of those things -- viable.

Clearly, to get every single thing done in a single session would be very difficult, and it might not be wise as a legislative strategy to seek to do absolutely everything. In any political situation, you have to use your political capital well.

But again, business confidence is based on tangible things and intangible. I think people will look at the degree of progress, at the seriousness of the government, whether they are using some of their federalization efforts to actually -- whether some of those turn out to be sincere efforts to actually implement the issues. As the previous question asked, if this is a way of making sure when reform happens, there's better ability to implement. These are all the things I think people will look at. There won't be a silver bullet and it won't happen overnight.

Q Was there any substantive discussion on rooting out corruption and tackling organized crime specifically, continuing more investigations?

MR. SPERLING: Well, President Putin brought it up fairly early. As I think I said, he talked very specifically about the fact that there is sometimes confusion in his press between capital flight issues and money laundering issues. They do have an anti-money laundering legislation. I think that it would be, again, a very positive sign for them to pass that, not only for the tangible impacts that has, but also for the intangibles, in the sense that it's a way of changing business.

I think there are other reforms -- what I would say is that there are many reforms in which this is an issue that is since being talked about. When you look at something like the WTO, when you have clear rules and more transparency and better custom codes, things are clearer. That removes the vagueness and discretion in your custom ports; that takes away a lot of the ability for both outright fraud, subtle fraud, subtle bribery. And that's not just in Russia, that's in anywhere. And one of the things we always stress in terms of WTO -- and we talked about this with China, as well, -- is that when you have clear, transparent, accountable rules, it takes away some of the arbitrary discretion that makes people less dependent on arbitrary state decisions, but also takes away the environment that can facilitate bribery and fraud.

Q Can I ask you a little bit about the Strauss mission? I don't understand quite -- but probably because not enough was said. On the one hand, your position is the Russians haven't done enough?


Q And, you know, and now Strauss is coming in with a bunch of big-bucks people, I'm sure, to look at ways to benefit from Russia's need for outside --

MR. SPERLING: No, that's --

Q Wait a minute. Does this mean you've turned a corner now, you think Russia is a safe place to invest, that in the IMF you will back the renewal of loans, with the starting the flow of IMF loans to Russia or again? Or is this just a survey they're taking?

MR. SPERLING: Well, I was going to start, actually, by saying that was a good question. (Laughter.)

Q I'll wait for a good answer. (Laughter.)

MR. SPERLING: I'll give you --

Q Surely you want it both ways?

MR. SPERLING: No, no, I'm going to give you a candid answer, which is that this is a private sector effort. And we did not, at this point, call for a public sector effort just for exactly the reasons that you're giving. In other words, I think it would be a good thing, at some point, if Secretary Daley could do something like that. But just for the reasons you said, I don't think it is as helpful for the U.S. government to use its sway to encourage people to take a second look at Russia before they've produced anything.

So I think that this is something Bob Strauss is doing, because of his long-standing both business ties to the U.S. and Russia. But I think the message very much from the President, from our President, was that he wants to be in a position to encourage people to look again, but that that can't happen until they can show some of these structural reforms happening.

And, in fact -- and this is probably the point you're referring to -- actually encourage that type of thing before it happened, it could be counterproductive. People could come over and say, nothing has changed as much. So I think they should look at the -- the Strauss visit as kind of a fortunate effort to at least perhaps explain to people what they're doing.

I do think one thing -- as one who has had a chance to meet some of the members of their economic team and look at their plan -- there is a very detailed and serious market-oriented plan here, and that is impressive to a point. Obviously, though, a plan that's not passed and not implemented is nothing more than paper. So it's a step. It's a necessary, but not sufficient step.

Q Could you -- did you talk at all about the Russian debt situation? And what would be the U.S. position on whether Russia deserved more debt forgiveness, particularly from creditor governments, particularly given its large current account surplus?

MR. SPERLING: Right. Well, the situation he's referring to, as everyone probably knows, is that Russia has about $159 billion of external debt. About exactly $100 billion of that is from the Soviet era, and so a discussion point that obviously the government raised, President Putin raised today and has been raised before is what type of Paris Club -- which, for folks who don't live and die by all this stuff, is the official government creditor club -- what kind of rescheduling or relief in some form could be talked about. They did mention, of course, that they got London Club relief of about 35 percent to 36 percent debt write-down, probably 50 percent in net present value terms from the private creditors. So the discussion certainly came up.

The President's reaction was what you would expect, which is that first things first. They have to first reengage successfully with the IMF. And we believe they have a new government, a new plan, and they are engaged in a new negotiation with the IMF, and we are hopeful that that will be successful. That's a first step for any discussion.

Secondly, they're going to have to take steps that build confidence within the Paris Club. Nobody, in any context, is for any form of debt assistance without the confidence that that debt assistance is going to proper purposes -- leading to economic growth, dealing with serious social problems -- and not to waste or other illegitimate purposes. So you really have to first engage successfully the IMF, show the structural reforms.

I think that President Clinton certainly made clear that in that context of success in those two areas, that he felt that the Paris Club members would certainly want to listen to President Putin and engage with him, and that obviously the goal would be, down the line, some form -- for Russia would be to be in a position where they could have some form of comprehensive plan.

But as to, you know, is that rescheduling? is that write-downs? Anything like that, that's just extremely premature and not anything that is appropriate for discussion at this point.

Q Did he discuss at all why he felt he needed these seven regional federal people above the governors, that he's just appointed? And did he ever specifically mention any of the major oligarchs that he might move against? Did he talk about the Bank of New York? Did he get specific about any of this stuff?

MR. SPERLING: On the first issue, it did not come up at this meeting, and I was not in the security meeting. I raised the issue with his economic advisor, Andrey Illarionov, and certainly they made the case in its most optimistic sense from the economic side, which is that they needed to have a structure that if they were passing economic reform, that they could give confidence that it could be implemented both effectively and in a fairly similar way throughout the regions. But that did not come up in the specific discussion that we had at this time. I would not be surprised, though, if the two Presidents did speak about that in the walks and other hours that they had.

It's an interesting issue, and certainly those of us who are on the economic side look at it and are curious to know to what degree it is designed for implementation of an economic plan, or whether it has other primary motives, or dual motives. But certainly those of us looking at the economic plan certainly are also looking at that and wondering what the connection could be, and whether it will be a positive one or not.

Q Gene, isn't it a chicken before the egg sort of scenario, that there has to be some sort of move against corruption and the oligarchs before anybody, any capital, would be willing to come into Russia? I mean, obviously, you know, there are allegations that some of the most senior people in the Russian government are corrupt.

MR. SPERLING: Well, I think I need to let them speak as to what their exact reason for the strategy is. And I don't want to become essentially their spokesperson, explaining why they're going for the seven super-districts, or why they're going for their reforms on the 89 regions.

As an economic advisor, I look at it and wonder if it is or could be part of a plan that could deal with effective implementation of an economic plan. But I say that as one looking, analyzing the situation. I can't tell you what all the exact reasons that they have, nor do I want to suggest that in some way affecting the status of the governors is tied in that way. I just don't feel I'm the proper person to speculate on that.

Q How forcefully did the President address the issue, in terms of how that relates to the economic package that they're working --

MR. SPERLING: Well, the President addressed it. I think that you have to understand that in this conversation, President Putin obviously knew that this would be an issue for us, and he addressed it very quickly himself, and talked very specifically about the need to fight money laundering and crime, and that that had to be a separate and focused effort apart and in addition to the more systematic structural efforts they are doing to prevent legal but at times damaging capital flight.

But again, I think it's very much part of the discussion when you're talking about WTO. The President also talked about Russia's potential in the high-tech area. I mean, right now 80 percent of Russia's exports are in commodities, so they're very dependent. The higher oil prices that are a headache for us right now are a blessing for them. But in the future, you don't want to have your entire economy or your revenue so dependent.

Now, when we're sometimes talking to some countries, you're talking about long-term efforts in their schooling and training system to build up a corps of highly-educated workers so that they could attract the kind of Silicon Valley-type of investment. Here, you have some of the most highly skilled scientists and technical people in the world. So you have a key ingredient to attracting the highest value-added.

But as any of you know, intellectual property issues are sacrosanct to anybody in that field. And until you have strong intellectual property protection, strong contract rule of law protections, you're not going to get that benefit.

But again, the issues on the rule of law came up constantly, and I think it's very interesting both on the security -- both in the non-economic issues and the economic issues, rule of law is often at the very front of the agenda.

Q Once again, it sounds like you keep reiterating the things that the United States would like to see Russia do, and once again, Russia has not done any of them. At least in the public discussion of economic matters and economic relations with the United States, there's a fair amount of prickliness on the Russian side -- that they keep getting lectured from the United States time and time again, nothing they do is ever good enough. I'm sure that your meetings were very polite. But did you find any signs of this prickliness on either side?

MR. SPERLING: We really are in a bit of a different situation here right now. This is a new government, they have put forward a new plan. This is not a situation where we are sitting there in a situation where we're being overly analytical on each and every thing. We're looking at a strong reform plan, but we're saying what anybody would say to the government of any country, which is, it's good to talk the talk, but you have to walk the walk, and you have to show the action.

Actions speak louder than words is, in a sense, a truism. But it's an especially important truism in any country where there has been talk of economic reform and it hasn't happened. That is going to up the -- there's not the record that simply having a good plan leads to reforms.

So people will look at the -- they will look at the action or the results. I didn't -- again, I found our conversations to be cordial and constructive, but maybe -- you want to follow up?

Q Yes, if I could. I mean, I understand where you're coming from, and you say whenever there's talk of economic reform and it doesn't happen, then that's not good. But in the Russian public discussion of the economy, they did reform, and it was a disaster, and it led to the August '98 financial crisis. This is the way that the Russian public, anyway, formulates these issues, and it makes them very difficult to discuss. And even the Prime Minister a couple of months ago said we don't need any more IMF loans because we're doing just fine. I mean, there's a real sense in the public discussion of withdrawal from engagement with the United States on economic issues.

MR. SPERLING: Well, two things. One, it's a positive thing when a country such as Russia says we are the masters of our destiny, we're going to take ownership of our economic plan. That is a positive sign. I did not take from that, however, meaning that they wanted to disengage. In fact, President Putin was very clear that they needed to engage with the IMF, and they understood that the IMF, working something with the IMF, a Russian-authored reform plan that is successful with the IMF is a key that unlocks many other forms of assistance and cooperation that are necessary after that.

Q You talk about reengagement with the IMF. Is this a big-ticket -- a return to the sort of big-ticket programs that we've seen? Or is this on a more modest, like last year, just a thing to get their current debts together, right? And second, you keep mentioning the plan. As far as I know, they haven't actually published a plan. We've seen elements of an economic plan.

MR. SPERLING: I think there is at least significant elements of a plan -- I think there are different drafts. But I think that -- I actually was just at a dinner with Minister Gref, who I think has been working on a draft that's around 400 pages long. Whether any -- you know, the degree that something is consensus, trial balloon, all those things -- that stuff is difficult enough to figure out in a political system that you know, as opposed to one that you're dropping in for a couple of days on right now.

But I think that people who have looked at what they're doing see a pretty significant seriousness in the degree of specificity and comprehensiveness. Again, I think most of the issues are, you know, will there be the political ability to pass it and implement it.

And the previous question asks an important question about public perceptions which -- again, I don't want to try to pass myself off as an expert on what the Russian public's perception is of different reform efforts. But the point I was making before is, I think that most people would feel that Russia has never really passed the kind of basic institutional structural issues -- that they may have had moments where their budget was in better shape or in worse shape or in fiscal situation.

But I think that in terms of actually passing effective banking, customs, tax reform measures, I think the reason why people are looking at this particular government and this particular plan with such great interest is they are seeing an effort at -- more of an acceptance at the structural areas. And, actually, as opposed to perhaps, past times, where maybe you might have had the case where the U.S. government was coming and stressing how important these things were, here there is -- President Putin is saying this to us, saying that focus on an attractive business climate, an attractive foreign business investment climate is critical, and that he is focused specifically on things that will attract that, and that he understands that one has to win that test with one's own retained earnings and domestic investment first.

So, again, I don't think that this was at all a situation of us preaching. I think that they were coming forward with a plan, with a type of plan that seemed to be right in the general direction to us. I think, however, the reality is, though, that for the United States to be in, a sense, out there pushing, one has to have results and action to point to in order to justify taking action to encourage people to invest. Russia has to lead; other people can validate, once they've led. You can't validate in advance of their own leadership and action.

MR. KENNEDY: Thank you very much.

Q -- the IMF?

Oh, I'm sorry, on the IMF. As you know, they are not -- this is not a matter of simply seeking to unlock the tranche from September that never went. I think they are clearly in a new discussion, a new framework. I don't want to second-guess exactly how that will turn out, but I think most observers think that it will be of a more modest and more basic framework, dealing with their repayments to the IMF itself.

Thank you.

END 10:40 P.M. (L)


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