[Congressional Record Volume 140, Number 112 (Friday, August 12, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: August 12, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                 RUSSIA'S CAPRICIOUS ECONOMIC POLICIES

                        HON. GERALD B.H. SOLOMON

                              of new york

                    in the house of representatives

                        Friday, August 12, 1994

  Mr. SOLOMON. Mr. Speaker, ``these days, most of Yeltsin's actions 
have nothing to do with establishing a market economy.'' This 
remarkable quote by the ousted Russian finance minister Boris Fyodorov 
appears at the end of an article by Peter Fuhrman which appeared in the 
August 15 issue of Forbes. The article describes the capriciousness of 
Russian economic policy and how this is severely disrupting the 
investment plans of Western oil companies. Indeed, many companies which 
were enthusiastically investing in Russia just 2 years ago are now 
ceasing operations and talking of pulling out altogether.
  The reason is that the Russian Government, whether it be Boris 
Yeltsin's executive branch or the newly elected parliament, cannot make 
up its mind as to whether Russia should be a modern, market-driven 
country, or whether it should remain in the dark ages of statism. 
Lately, the government, including, and especially Yeltsin, has been 
choosing statism.
  For instance, the Philbro Corp. invested in Russia 4 years ago under 
a guarantee that it would be able to export oil from Russia free of 
duty. Now, thanks to a few of the more than 3,500 decrees Yeltsin has 
issued in the past 18 months, Philbro has been slapped with retroactive 
taxes of up to 70 percent of revenues. Yes, that's revenues, Mr. 
Speaker. Additionally, Yeltsin stripped Philbro of a drilling license. 
Just like that.
  It's no wonder foreign investment in Russia is drying up, Mr. 
Speaker. The markets are responding as they always do, swiftly and 
logically, to the uninviting business climate in Russia, which exists 
courtesy of the Russian Government.
  It's interesting to note that the U.S. Government is responding as it 
always does too, Mr. Speaker--slowly and illogically. For, while the 
markets are already giving an emphatic thumbs down on russia's 
performance, the Clinton administration and this Congress are still 
under the delusion that there is a serious reform effort going on in 
Russia.
  By the time Government wakes up to this fact, billions of American 
taxpayer dollars will have disappeared without a trace.
  I submit the Fuhrman article for the Record.

                         What Boris Gives . . .

       In 1990 Phibro Energy, a subsidiary of Salomon Inc., became 
     the first large U.S. investor in the Russian oil business. 
     Phibro formed a joint venture with a Swiss partner and a 
     Russian partner, poured $115 million into a large field in 
     western Siberia, and today the field is pumping 28,000 
     barrels a day. Half the production is being exported to 
     Western Europe, at a profit, after transport costs, of around 
     $10 a barrel.
       An early success of capitalist investment in postcommunist 
     Russia? No. Phibro is talking about pulling out. Blame the 
     unpredictability of Russian law. In the three years since 
     Phibro began doing business in Russia, Boris Yeltsin has 
     issued thousands of decrees, some of which annulled terms of 
     the contract Phibro signed. Annulled, for example, is a 
     guarantee that Phibro could export oil free of Russian export 
     taxes. In its place are new taxes--many applied 
     retroactively--that effectively grab 70 percent of Phibro's 
     gross revenues--not profits, revenues. Another Yeltsin decree 
     retroactively stripped Phibro of one of its drilling licenses 
     and transferred the license to a tribal group in Siberia.
       ``Our contract has been constantly breached, and we're 
     being treated like a bunch of suckers,'' fumes an exasperated 
     Phibro executive.
       Phibro is not the only sucker. Gulf Canada is cutting off 
     all additional investment in an oilfield near the Arctic 
     Circle, where it has already committed $60 million. The 
     company says its Russian tax bill exceeds 100% of its total 
     revenues. ``Where I come from,'' volunteers a Gulf Canada 
     engineer, ``that's called expropriation.''
       Expropriation and worse is the inevitable result of a 
     system where the rule of law is not firmly established. Last 
     year Yeltsin issued 2,300 decrees, and he is on course to top 
     that number in 1994. He is using the decrees as currency to 
     buy political support from the military and the bosses of 
     Russia's large old-line industrial companies.
       The decrees lavish benefits on the politically valuable: 
     cheap government credits, lucrative export licenses, 
     exemptions from privatization rules, protection from foreign 
     competition and outright exemptions from tariffs and taxes. 
     Andrey Illarionov, who recently stepped down in disgust as 
     one of the Russian government's top economic advisers, 
     estimates the total of Yeltsin's handouts at $40 billion.
       Aeroflot and Avtovaz, the manufacturer of Lada cars, have 
     gotten sweet deals--both receiving exemptions from import 
     duties and taxes. The Russian Army wangled a decree allowing 
     it to keep more of the money made from arms exports. The 
     generals are using the windfall to invest in Moscow real 
     estate.
       The richest giveaways are in Russia's oil and gas industry. 
     Yeltsin has kept domestic oil prices low--currently $6.50 a 
     barrel--to hold down transport costs. But to make it up to 
     the big Russian oil companies, he has raised taxes and export 
     levies on foreign oil companies while eliminating them on 
     Russian oil firms.
       The new taxes on Western companies have brought in about 
     $100 million so far, but the concessions to Russian oil 
     exporters have cost the Russian Treasury ten times that 
     amount in lost tax revenues. Worse, it has all but stopped 
     the flow of badly needed foreign investment into the 
     industry. Last year the U.S. Congress earmarked $2 billion 
     for credits and guarantees to companies willing to invest in 
     Russia's oil industry. So far not a penny has been claimed. 
     Government credits or not, the oil companies don't trust 
     Yeltsin.
       Yeltsin is aware that his free hand with tax benefits was 
     costing Russia badly needed tax revenues and badly needed 
     foreign investment. So, a month before the recent G-7 summit 
     in July that discussed aid to Russia, Yeltsin issued a decree 
     that promised to exempt Western oil companies including 
     Phibro and Gulf Canada from the $5-a-barrel export tax on 
     July 1.
       But when July 1 rolled around, nothing happened. The 
     Western oil companies are still paying the tax, and the 
     Russian companies are not.
       Adding insult to injury, Yeltsin recently revoked a May 
     decree doing away with special export licenses that channeled 
     virtually all of the $12 billion in annual oil exports 
     through a small group of Russian firms. According to a former 
     minister of economics under Yeltsin, these licenses are the 
     major source of government graft: To obtain one, Russian 
     companies fork over to bureaucrats a bribe equal to 10 
     percent of the expected annual revenues from the license.
       Yeltsin apparently gets many of his oil policy ideas from 
     Russia's prime minister, Viktor Chernomyrdin. A former 
     Communist Party technocrat, Chernomyrdin used to be the boss 
     of Gazprom, the state gas monopoly that is now Russia's 
     largest and most profitable company. Last December a Yeltsin 
     decree exempted Gazprom from paying import duties and taxes. 
     Gazprom also has a special deal that allows it to convert the 
     dollars it earns on gas exports into rubles at double the 
     official rate.
       Instead of remedying the mess, Yeltsin apparently thinks he 
     can paper it over with smart flackery. In June Chernomyrdin 
     met with Bill Clinton in Washington and signed a production-
     sharing agreement with a consortium led by Marathon Oil to 
     develop, at a cost of $10 billion, an offshore field near 
     Sakhalin island. The White House hailed the agreement as 
     history's largest investment in Russian oil.
       In fact, the agreement was pure theater. Marathon 
     executives say the signing was carefully staged. Marathon and 
     its partners will invest nothing unless there are big--and 
     irrevocable--changes in Russia's tax and property laws. Not 
     likely.
       ``These days, most of Yeltsin's actions have nothing to do 
     with establishing a market economy,'' an exasperated Boris 
     Fyodorov, the former finance minister, tells Forbes. ``It's a 
     replay of the last days of Gorbachev, with the leader talking 
     about reform while giving favors and privileges to the groups 
     who most strongly oppose it.''

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