Nord-Ost: Terror in Moscow

The Moscow theatre hostage crisis, also known as the 2002 Nord-Ost siege, was the seizure of a crowded Moscow theatre on October 23, 2002 by about 40-50 armed Chechen terrorists who claimed allegiance to the separatist movement in Chechnya. They took 850 hostages and demanded the withdrawal of Russian forces from Chechnya and an end to the Second Chechen War. The siege was officially led by Movsar Barayev (aged 25).

After a two-and-a-half day siege, Russian Spetsnaz forces pumped an unknown chemical agent into the building's ventilation system and raided it. Officially, 39 of the terrorists were killed by Russian forces, along with at least 129 and possibly many more of the hostages (including nine foreigners). All but a few of the hostages who died during the siege were killed by the toxic substance pumped into the theatre to subdue the militants.

// Wikipedia

A good and terrifying western documentary about a tragedy do truly Russian: after a successful police operation the - already freed! - people died simply because they were not given the right treatment.


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Forbidden to forbid: Georgia as Field for a Macroeconomic Experiment

The idea to protect economic freedoms on a constitutional level has for the first time been thoroughly formulated in the post-Soviet region by the Belarusian economist Jaraslau Ramanchuk. In 2007 he presented the project of an Economic Constitution of Belarus[1]. This document was supposed to supplement the country's Constitution in terms of economic policy and to guarantee economic freedom for the citizens and limitations for government intervention in the economy on the constitutional level. This may look as an interesting, but utopian intellectual project for Belarus, but in Georgia it will soon be reality.

A liberal economic regime guaranteed by Constitution

Georgian President Mikheil Saakashvili proposes to protect and expand the country's liberal economic regime on the constitutional level. According to the Act on Economic Freedom and the relevant amendments to the Constitution, a draft of which he introduced to the Parliament on October 6. If passed, the new legislative acts will set limits on the size of government expenditures and public debt, prohibit the imposition of additional licensing and other restrictions on economic activity of private entities.

Besides that, it will be forbidden for the Georgian state to own shares in banks and put restrictions on convertation of the national currency or movements of capital. Any tax increase will have to be approved on a national referendum [2].

Given that the pro-presidential party has a constitutional majority in the parliament, the Act and the amendments to the Constitution are likely to be passed.


Georgia's success under Saakashvili

Just like any politician, Mikheil Saakashvili can be criticized for many things: for an authoritarian domestic policy, maybe for lack of flexibility and diplomatism in foreign policy (although it is difficult to imagine what a president of Georgia could make in order to avoid the war with Russia in August 2008). Even this initiative and the way it has been announced has a fleur of PR and populism on it. But what no one is able to question is the scale of socio-economic progress achieved by Georgia under Saakashvili.

According to most international rankings, Georgia has one of the most attractive environment for business and for investors in the region (and even in the world). Having almost no natural resources or major industries from the Soviet era, in 2004-2008 the country showed an average annual GDP growth of 9.3% which is comparable to the rate for Belarus (10% in 2008, 8.2% in 2007, 9.9% in 2006) with its preferential prices for Russian raw materials, Soviet industrial legacy and manipulation with statistics.

The flow of foreign investment in Georgia has not stopped even after August 2008 (although it dropped to USD 226.1 million in the first half of 2009 to USD 1.143 billion for the same period of 2008). Economic losses of Russia from the war in the form of capitalization of Russian companies fall (a few tens of billions of dollars), the withdrawal of capital from the country (up to USD 20 billion) and the drop in Central Bank reserves (USD 16 billion) were much greater than the loss of Georgia, so the question of who has really lost that war is not a rhetorical one.

Now Saakashvili together with Kakha Bendukidze, the father of the Georgian economic reforms and co-author of the Act on Economic Freedom, have led the country to a major turning point, when the economic transformation is about to get a real deeply institutionalized character.


The essence of the planned economic transformation

The new reform will not simply allow Georgia to get immunity from leftist populist politicians, because forced redistribution of wealth will be more difficult. Mikheil Saakashvili has a chance to remain in history not as a man who lost the war in South Ossetia or returned control over Ajaria, a different separatist region. Saakashvili and Bendukidze are starting an interesting large-scale experiment, perhaps unprecedented in the economic history. For the first time a country of several millions people will try to move to quite a revolutionary socio-economic system, which differs significantly from the generally accepted model of a Keynesian economy.

It is difficult to blame the current global economic crisis on the free market as long as the modern state holds the key control over the economy through manipulation with interest rates, currency or the amount of money in circulation, or even more through direct participation in economic life. Bendukidze and Saakashvili decided to give up some of these institutional postulates that seem to be axioms for ordinary people but which were not common practice even 100 or 150 years ago. If the experiment is successful, the Georgian experience might have a truly global significance, the example of Georgia could become an important step towards a new economic model.


Obstacles and successes: Georgia and other countries

The main thing that can prevent the success of the newest Georgian reforms are the well-known external circumstances and the well-known danger of war that hangs over the country. Those who wish the Georgian experiment to succeed may only hope for peace in the region. It is noteworthy that this reforms just makes Georgia very interested in peace with its neighbors: in fact, it is much more effective for Georgia (taking into account Russia's military presence, actually much more easy as well) to attract the Abkhaz and South Ossetians with social and economic progress than to return control over these regions by military power.

Circumstances have helped Georgia to carry out radical economic reforms: destroyed by war and corruption, the political leaders simply had no option but to make the economy regenerate itself by implementing radical liberal reforms. Reforms bring their results, and Georgia now looks very well compared to other post-Soviet Caucasian countries - Azerbaijan, where the economy is only driven by oil exports, and Armenia, corrupt and surrounded by enemies.

A low starting position, when there is nothing to lose, plus a strong-willed and well-educated authoritarian president turned out to be the ideal conditions for effective economic reforms. Belarus can only envy and closely monitor the Georgian economic experiment: the time will come to learn from the Georgian reforms, and it may come sooner than it seems.


___________________________________________________________

[1] for more details about the Economic Constitution of Belarus see here (in Belarusian)

[2] for details see here (in English) and here (in Russian)


// Novaja Europa
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Belarus: a Reason for Cautious Optimism

My newest article in the Belarusian newspaper Nasha Niva, here translated into English (blame Google Translator for the errors! )) ):

Belarus: a Reason for Cautious Optimism



"For me there is no such country as Belarus," a British business coach told me three years ago. The man was proud to have taught in almost all European countries. More precisely, all except Belarus.

An isolated island between the EU and the more-less globalized Russia, Belarus just did not exist then for the international business.

Many things have changed since then. Belarusian authorities have started trying to diversify their foreign relations, to attract investments and privatize large enterprises. However, Belarus still remains a terra incognita for the international investment community.

The responsibility can be put on the global financial crisis, in the midst of which Belarus has entered the information field as an eventual investment target. The crisis dramatically reduced the number of investors and increased the number of objects for investment in countries with much lower risk than in Belarus.

One should still praise the Belarusian Government for its efforts: the economic liberalization goes on, even though sometimes strangely or slowly. There were statements as to Belarusian companies entering Western capital markets. There are negotiations on a tender among foreign investment banks to advise the Government of Belarus on privatization issues. Private investors are establishing joint ventures in the country. And at the beginning of the month the news came out that Beltelecom, the telecommunications monopoly, may be either offered for sale or transformed to joint stock company before the end of the year.


The backlog is growing every day

Despite the increase in the overall rating according to WB's Doing Business report, Belarus, according to the same study, has the world's worst (!) taxation system and is located in the bottom of the rating as to level of investment protection. As long as there is no progress there and as long as the government is using Soviet-times economic policies, especially related to price regulation, no investors will come to the country.

The Belarusian government seems to have set a formal goal of correcting two or three paragraphs of Doing Business each year: last year there was a sharp spurt in property registration and issuance of building permits, this year we saw a progress as to company registration. Hopefully by fall of 2010 we may expect progressive changes in the taxation system, international trade or protection of investors - the key framework characteristics to be improved by Belarus.

Besides that, it seems that the progress of market reforms is more concerned with implementation of formal criteria for Doing Business and is motivated by pressure from the International Monetary Fund rather than by the awareness of the necessity of these reforms for Belarus.

This applies to privatization, where the government is slow to pass key legislative acts. Negotiations on the partial privatization of MAZ, BelAZ, and a number of unprofitable enterprises are being held behind the scenes and opaque. Can the investor have certainty in this situation? There are two and a half months left till year end, and the public had not yet received a report about how the planned privatization of state companies is going on for 2009 - as it has newer seen a report on realization of the privatization programme for the year 2008.

Soviet culture of management, even in large enterprises, the inability to operate in a free market, and even poor English language skills - in these important aspects of Belarus remains if not the most backward country in Europe. The backlog is growing every day that the company is not sold to private investors who could modernize the business. With the growth of the backlog, the eventual privatization price goes down and so does the potential revenue for the deficit Belarusian state budget.


Belshyna on the Warsaw Stock Exchange

For the success of economic reforms Belarus needs an Agency for privatization and attracting of foreign investment, which would advise foreigners and inform the public about the progress in privatization of state industry.

It is not clear what the result was given an undisclosed amount spent on the British PR agency of Lord Timothy Bell. Interviews organized by the agency in the western media were rather some curious and exotic dictator interviews, but it is difficult to speak of their positive effect on investment attractiveness of Belarus. Perhaps the PR effect was the fact of signing a contract with Bell itself. Another effect was the sense that before engaging in PR you need to create something that would actually require this PR.

It would be interesting if the government of Belarus would organize at least one IPO of a big company, for example, the tire producer Belshyna on a stock exchange close to Belarus, for instance, the Warsaw Stock Exchange. The country should have enough resources to afford listing at least one state enterprise. In parallel, in such a case study would be to debug the legislation, which would allow to maximize the potential price of assets sold on the market in the future.

Belarus should use the experience of its neighbours and attract successful Eastern European reformers like Mart Laar, Vaclav Klaus or Kakha Bendukidze as advisers. Moreover it should make use of internationally recognized Belarusian economists like Jaraslau Ramanchuk or Aleh Tsyvinski. Unfortunately, it does not seem realistic that the government would do so.


Step into irreversibility

One shouldn't expect the return of politically motivated sponsorship of Belarus from Russia, therefore there is no alternative for Belarus but to attract foreign investment and to mobilize the entrepreneurial potential of the nation. The latter is possible only through economic freedom.

It is generally believed that economic freedom leads to political freedom. In fact, the demand for political freedom can appear only once there will be a group of wealthy entrepreneurs independent of the state. We have the example of modern Russia, where the regarding human rights, according to international organizations, is not much better than in Belarus, but where business conditions are much more favourable.

The Belarusian authorities have the opportunity to revise the social contract in the direction of stimulation of private entrepreneurship, refocusing on active and young people, as it is now in Russia. It is an uneasy but potentially very promising goal for the government of Belarus.

If the transformation of the economy will be conducted properly and if the country will avoid major economic shocks, the current regime will have time to adjust to new conditions and, possibly, to prepare for a step-by-step introduction of a pluralist democracy that will be demanded by its Western partners. With the progress of the reforms the Belarusian bureaucracy will adapt to them and start being interested in them.

Reforms in Belarus did not obtain the proper tempo, shape and transparency, but there is still reason for optimism: they have probably become irreversible. The effects of political and economic decisions are not felt immediately. But there is hope that after the past lost fifteen years, the country has entered a path towards constructive development.

// http://nn.by/index.php?c=ar&i=30692
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