HC Deb 27 October 1998 vol 318 cc242-50

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Kevin Hughes.]

8.56 pm
Mr. Paul Keetch (Hereford)

I am pleased to initiate my second Adjournment debate since my election on an international subject that is very close to my heart. I chose to debate this topic tonight as a result of an Inter-Parliamentary Union trip that I made to Russia last June. The right hon. Member for Manchester, Gorton (Mr. Kaufman) led the trip, to Moscow and St. Petersburg, and I am delighted to see several members of that delegation in the Chamber tonight. The right hon. Gentleman and some other members of the delegation were returning to Russia, but it was my first visit to that country. They were able to see the changes that had taken place since their previous visits, while I could only look on in wonder.

To understand the economic crisis now befalling Russia, one must understand the political crisis. If one were to ask schoolchildren the date of the Russian revolution, they would answer "1917". However, the revolution of perestroika, begun in the late 1980s by Mikhail Gorbachev, is far and away the greatest change that Russian society has seen this century. That revolution brought so much political change so quickly that the political crisis that followed it has now led to economic catastrophe.

Mr. Nigel Jones (Cheltenham)

Would my hon. Friend care to speculate on what the history books will make of Mikhail Gorbachev? Some people see him as the man who changed the world, but the Russian people who voted in the last presidential election gave him only 1 per cent. of the vote—so they are not happy with him. I had the privilege of meeting Mikhail Gorbachev in 1993 when he visited my constituency. What does my hon. Friend make of the long-term view of what Mikhail Gorbachev has done to a once great super-power?

Mr. Keetch

I think that Mikhail Gorbachev will be remembered slightly better by history than the present president, President Yeltsin. Russia is the one place in the world where I would not advocate that people vote Liberal Democrat. It is somewhat embarrassing every time a Liberal Democrat visits that country.

The revolution that brought so much political change has led to an economic crisis in Russia. In short, the transition that the United Kingdom effected over hundreds of years—the transition from absolute ruler to democracy—has taken place in Russia in under a decade. It is no wonder that there are problems. It is interesting to examine what has changed. Russia has gone from a super-power surrounded by client states, with power vested in a few people, to a country by itself. In doing so, it has lost many of its more prosperous and plentiful territories. It has been stripped of much of its international pride and position. It has seen the dismantling of the military economic machine that used to drive it. In short, Russia is now regarded by the world as the loser in the cold war.

With no democratic tradition to fall back on, it is not surprising that, in 10 years, such dramatic change has been less than smooth. The reforms that President Gorbachev introduced, ending in the coup that almost toppled him, resulted in the end of the Soviet Union in 1991. The changes to the constitution forced upon parliament by President Yeltsin ended in his troops shelling Parliament in October 1993. The subsequent rivalry between the Duma and the president continues today. These are some of the factors that have formed a breeding ground for economic chaos.

Boris Yeltsin's health, too, declining during this period, has led to a situation today which would have been, for many Russians, unthinkable only a few years ago—a Russian president who is the butt of jokes at home and abroad, a living embarrassment to all Russians. It is no exaggeration to say that the Russian economy today is as sick as the Russian president.

It is sometimes difficult to make comparisons, but the output of Russia now is barely half what it was in 1989. Officially, central Government expenditure this year was set at 500 billion roubles, with revenue coming in at just 367 billion roubles. In other words, that is Government expenditure of £17.5 billion with an income of just £13 billion. That deficit would be bad enough, but in reality nothing like that revenue has been achieved. Add to that the crippling debt burden of 121 billion roubles a year, and the crisis was inevitable.

Mr. Lembit Öpik (Montgomeryshire)

Would my hon. Friend agree that the sad tale that he describes for Russia is almost the opposite of the success stories of the recovering economies such as Estonia, which broke free from the Soviet Union? Does he agree that, as Estonia develops, links with western Europe should be built? At the same time, my hon. Friend will know that there are concerns in the Baltic states that Russia might cast an ominous eye again. Does he agree with the adage that people who live in glasnost should not throw Estonians?

Mr. Keetch

My hon. Friend is well known for his sense of humour and Estonian connections. I have visited the Baltic states, and have been to Lithuania on two occasions. I know of the enormous success and leaps forward of some of the Baltic economies. Estonia is a shining example, and we should certainly support its economy.

The crisis in Russia is far from over. The Morgan Stanley Dean Witter brief on the Russian economy recently highlighted industrial production in August down by 8.5 per cent. The economic growth forecasts that it was suggesting, being at the bottom range of minus 2 per cent. for 1998 and 1999, are being revised downwards to minus 5 per cent. for this year and minus 10 per cent. for next year.

In the cities such as Moscow and St. Petersburg that I and my colleagues visited, the semblance of Russian economic prosperity exists. There are McDonald's restaurants, expensive shops and advertising, all features of the Russian scene that are new over the past few years. However, it is not necessary to go far from the city centres to come across vast Soviet-style tenement blocks where millions of people live. These are huge, cold and dark buildings, often with no electricity or water supply. These are the hovels which ordinary Russians call home.

In St. Petersburg alone, the population has fallen by more than 600,000 since the early 1990s. People have moved into the country to try to find food. Those who stay have their own allotments. They try to grow what they can. However, the search for food is a desperate one. Life in the provinces is even worse than that in the cities.

Anybody who has seen a second world war film, especially about prisoner of war camps, will have heard about Red Cross parcels. Yet today the Red Cross is trying to launch a £10 million appeal for food for Russia. It is distributing Red Cross food parcels to people who cannot feed themselves in Russia. This once great super-power now receives international food aid.

Medicine, too, is in short supply. Shortages of basic medicine have led to a huge rise in diseases that we in the west long thought had disappeared. Poor diet and even starvation have led to huge numbers of Russians dying from economic neglect. Last year alone, more than 10,000 prisoners in Russian gaols died of illness. The life expectancy of the Russian male is now below 60. In all, last year, almost 25.000 Russians died of tuberculosis, and another 2 million are infected. Even so, in Moscow four hospitals are kept just for Members of Parliament, bureaucrats and army chiefs, ensuring that the elite remain healthy. Even bank robbers in Russia now go short. In a recent break-in at the Vimpel bank in central Moscow, thieves got away with the total takings of just 13,000 roubles—about £120.

Perhaps the biggest and most widely talked about of the economic problems is the late payment of salaries. Wage arrears in the public sector are estimated to be around £750 million, resulting in despair for hundreds of thousands of families. Doctors, nurses and teachers go unpaid. In Russia today, people strike not for better pay, but simply to be paid.

The story is similar for state pensioners, and even in the armed forces salaries are sometimes not paid. Wage arrears were supposed to have been stopped last July, but in reality still exist. Stories of soldiers selling off their weapons and equipment to terrorists for money to live are not exaggerated. Not surprisingly, that has led to huge discontent in the army—no wonder, in a country where officers and their families sleep four to a room.

In 1997 alone, 304 murders were recorded in the Russian armed forces, and, following the Chechen military debacle which shook Russian military confidence, the economic crisis has hit the once proud Red Army. An army that once defeated Hitler's Nazis is now at rock bottom. There is no money for research and development, training is minimal, and exercise is unknown. Reductions in manpower in the Russian armed forces are huge, with some 300,000 officers and non-commissioned officers a year being made redundant. It is interesting that the Interior Ministry troops who were so loyal to President Yeltsin in 1993 are still being paid, but no one today believes that they would once again rush to his aid should he need it.

Even the environment is against the Russian economy. In one region of southern Russia, Kalmykia, more than 25 villages have had to be abandoned in the past 20 years due to the spread of a desert. An area the size of Belgium is now sand.

What can we do? One thing that anyone who knows Russia will tell us is that the Russian people have long memories. Other countries may abandon Russia and other Governments pull their people out, but we in the United Kingdom must not. We owe it to the Russian people and to world stability to ensure that the Russian foray into democracy is a success. We must preserve the rule of law in Russia, because, if we do not, we shall simply see the rule of terror.

Helen Jones (Warrington, North)

Does the hon. Gentleman agree that in Russia there is a great sense of friendship towards Britain, and that, as one of the major problems affecting the Russian economy is massive tax evasion and the influence of organised crime, that is one area in which that friendship could be used to assist the Russian people to tackle those problems in order to move their economy forward?

Mr. Keetch

The hon. Lady is absolutely right. She well knows the plight of the Russian people, having, like me, been a member of the IPU delegation. I am not necessarily calling for more monetary aid, but the kind of schemes that she has suggested—she is involved in schemes with the British Council—would do much to help support Russia

When we were there, we saw the people who might lead Russia should the Russian foray into democracy fail—former Communists who believe that the Soviet-style planned economy did work, nationalists who believe that President Yeltsin illegally gave independence to Russian territories and who want those territories back. We even met liberals who talk about NATO expansion as a real threat to mother Russia. Madam Speaker has similarly returned from Russia, having met many of the same people.

I did not initiate this debate to obtain answers, because we may not be able to give them, but the House must make it known to democrats throughout Russia that we will not abandon them. Our Government must re-emphasise their pledge to support British programmes in Russia, such as the excellent ones run by the British Council, to help democracy survive. The British Council is now looking at close links between our two nations, including links between schools, and establishing information technology links with schools and exchanges for Russian teachers and children. The Government must support those schemes. We must encourage more business and trade with Russia. Most of all, our foreign policy must support the pro-reformers and those who want democracy to survive.

Imagine the prize of success for Russia—a country that is democratic, reformed and economically buoyant. That prize should be our principal foreign policy objective.

Mr. Adrian Sanders (Torbay)

I gave my hon. Friend notice before the debate that I might intervene. Given the enormity of the problems, does he agree that no nation state alone can offer assistance, and that the best hope lies in the aid programmes to which we can contribute through the European Union?

Mr. Keetch

My hon. Friend is right. Britain cannot solve the problems by itself, but it is important to remember that it has a special relationship with Russia. The Russian people are understandably suspicious of the Germans, the Japanese and the Americans. They would welcome British involvement, and I hope that the Government will take a lead in that.

The price of failing to support the Russian economy is huge. In its negotiations in the forthcoming weeks, the International Monetary Fund must not seek to impose on the Russian Government the terms normally accepted for IMF support, because Russia could not take them.

Mr. David Kidney (Stafford)

The hon. Gentleman is developing an interesting and powerful speech. On IMF support, the conditionality that has been imposed has been to collect taxes that are lawfully due. My hon. Friend the Member for Warrington, North (Helen Jones) referred to that a moment ago. Does he accept the fundamental point that taxes lawfully raised must be paid if Russia is to be the success that he wants it to be?

Mr. Keetch

I certainly accept that, but I hope that the IMF will not only put in place conditions but provide practical support that will allow Russia to meet those conditions. Russia simply cannot meet those conditions by itself. As the hon. Member for Warrington, North (Helen Jones) said, it needs our practical help and experience in collecting those taxes.

History has a nasty habit of repeating itself. We all know what happened to Germany in the 1930s after it had been made to pay too high a price for losing the first world war. Let us not expect Russia to pay too high a price for losing the cold war. The world has never known a super-power with a vast arsenal of nuclear weapons that cannot pay its employees. The House and the Government must get the message across to Russia that we will not let it give up on democracy. If it does, the whole world will suffer.

9.12 pm
The Economic Secretary to the Treasury (Ms Patricia Hewitt)

I thank the hon. Member for Hereford (Mr. Keetch) for his initiative in introducing this debate, and congratulate him on his excellent speech and evident interest in, and concern and knowledge about, the conditions in Russia. His description of the state of the economy and of Russian society is absolutely right. As he said, gross domestic product has fallen by 10 per cent. in the past 12 months, inflation has risen by 50 per cent., and tax revenue, which was never particularly good, is shrinking rapidly. Clearly, barter and non-payment are rapidly on the rise. Perhaps most distressing of all is the catastrophic drop in life expectancy, particularly among men, since the fall of communism, exacerbated by the current economic crisis.

The position is as serious and distressing to everyone as the hon. Gentleman has described. However, it must be understood that responsibility for tackling the problem lies, as it must, with the Russian Government. We cannot guarantee law and order, or economic stability and all the other things that Russia needs. It is for the Russian Government to take a lead and to implement the policies which will bring real economic and social benefits to a country in immense distress.

The priority is clear: Russia needs to develop a coherent macro-economic framework and to get its public finances under control, because without that, it cannot regain economic stability. It certainly has to introduce tax and expenditure reform, and needs to restructure its banking sector, because there is near-bankruptcy or worse among many of its banks. It needs to close insolvent enterprises, and to tackle the problem of barter and non-payment. It of course has to develop and try to enforce the essential, the basic, legal and institutional framework of a market economy, because that is clearly missing.

The hon. Member for Hereford and my hon. Friend the Member for Warrington, North (Helen Jones) mentioned the excellent work of the British Council. As a short-lived former vice-chair of that organisation, I also pay tribute to the work that it has been doing in know-how transfer, and in helping to build that capacity within Russia.

The Government are not only actively monitoring the situation in Russia, but are in regular contact with our partners there, in the G7 and in the European Union. The Russian Government are, however, still formulating their economic policies. We and our international partners—this cannot be done by one country alone—remain ready to support and work with Russia, and with its Government, in support of sustained efforts towards stabilisation and reform.

As the hon. Member for Hereford said, the international community must be ready to back International Monetary Fund financial assistance, but that assistance must be given in support of credible and sustained efforts by Russia towards stabilisation and economic reform. There is no point in supporting policies which will not work.

We, and our partners in the EU and the G7, are more than ready to help with this process, and we are re-focusing the technical assistance programmes accordingly. The international community also needs to continue to monitor the situation on food supplies and on medical supplies. If there is clear need, we must and will be ready to ensure that humanitarian assistance is provided.

I should like to connect the situation in Russia, which the hon. Member for Hereford described so vividly, with the second half of the title of the debate—the world economy. The direct effects of the crisis in Russia are relatively small—before the collapse, Russia contributed about 1 per cent. of total world output, and accounted for 1.5 per cent. of world trade—but that is not the case for certain countries. Ukraine, which does a quarter of its trade with Russia, was particularly badly affected, and remains so even today.

There is also a direct impact on those banks, especially in Germany, which were severely exposed to the situation in Russia, but the indirect effects on the rest of the world economy—the contagion of the collapse in Russia and the default on debt—are of immense concern, to the hon. Member for Hereford, his hon. Friends and all of us.

Japan, the world's second largest economy, is expected to contract by 2.5 per cent. this year, and that following several years of low growth. Another region—which, hitherto, had been the growth engine of the world economy—also faces unprecedented declines. We are all affected, and not only for humanitarian reasons. We are dependent on each other's goods and services—the Asian crisis has cut United Kingdom exports to Indonesia, Malaysia, South Korea and Thailand by between 50 and 60 per cent. in a single year—and, as we have seen over recent months, a weak financial system in one country then threatens the financial systems of other countries. We are having to deal with the consequences of the financial turmoil and the destabilising lack of transparency.

We are faced with a crisis that grew because of weak, under-supervised financial institutions in developing economies, and which became global because of deficiencies in supervision and in risk management, even in developed economies. It became a prolonged crisis because the initial policy responses were more suitable for over-extended pubic sectors than for over-exposed private sectors.

Not only in Russia, but across a large part of the world, this crisis has become a human tragedy for millions of people. They are the victims of inadequate social protection. We must deal with the situation in Russia, and continue to work with the Russian Government to try to support efforts to achieve first political stabilisation and then economic and social stabilisation. We must also deal with the problems in the global economy. We must begin by addressing the short-term problems. We should recognise that the balance of risks has changed, and act accordingly.

Monetary authorities around the world continue to be vigilant. Crucially, G7 countries have committed themselves to creating or sustaining the conditions for demand-led growth and financial stability in their own economies. In addition, we must address the underlying longer-term problems that have contributed to the current crisis in Russia, Japan and in the world economy. That requires an international financial architecture that is suited to today's global economy, not to yesterday's.

For 50 years, the world economy has had policies for regulation, supervision, transparency and stability that were devised and developed for a world of relatively sheltered national economies with limited capital markets. We must now create procedures for supervision, transparency, regulation and stability that are as sophisticated as the markets with which they have to work, and try to prevent the collision of inadequately regulated global capital flows with inadequately developed and supervised national banking systems, which has been a common feature of the crisis in many countries.

Mr. Michael Colvin (Romsey)

I hesitate to intervene, but last week I was in Moscow, and I had the opportunity to talk to members of the Duma about the current crisis in Russia. They said, "It's not money we want from the west. We need to know how we can stop our wealth draining out of our country." That is the problem at the moment. It is like pouring water into a colander. Last year, 40 per cent. of Russia's oil went on to the black market, without anyone knowing where it had gone to. They need such assistance more than some high-flown IMF package which will impose conditions that they will not be able to comply with.

Trade is more important than anything. Over the years, the central European free trade agreement has worked well for the countries of central Europe. The sooner we extend that eastwards into Russia, whose centre of gravity is European, the better it will be, not only for Russia, but for the rest of Europe and the rest of the world.

Ms Hewitt

The hon. Gentleman makes two extremely important points. He is right about the importance of trying to re-establish and to develop trading relationships with Russia, and to draw it into that broader European family. That in turn depends on securing a financial ands legal infrastructure for its economy. As he rightly says, the wealth and income that they ought to have in Russia is draining out faster than they can replenish it. That is an issue for those who might wish, or be able, to trade with Russia, and to benefit from such a trading relationship. The trading relationship itself will require an adequate economic and legal infrastructure—in other words, the fundamentals of a market economy in Russia.

I agree with the hon. Member for Romsey (Mr. Colvin). It does not come down simply to the question of a financial architecture and sorting out Russia's banking system, although that is important; it also comes down to technical assistance. It comes down to the help that we can give the Russians to secure the basics of a functioning market economy with a functioning legal and contractual system, and with something resembling an efficient tax collection system.

Unfortunately, Russia must act on many different fronts at the same time. I do not think that it is possible to work on the trading end of the relationship without also working with Russia to put in place the basics of the economic infrastructure that it so badly needs.

That, in a sense, is precisely the point of what we and our partners in the G7 and the European Union are trying to do to establish a stronger, modernised global financial and trading architecture. National Governments, helped by international institutions, need to set clear, clearly understood, long-term policy objectives that will build confidence and establish their credibility. That applies to all countries, whether they are beginning the process of creating and developing market economies or are a long way down the line. That is why the Government have welcomed the International Monetary Fund's new code of good practice on fiscal policy, and look forward to similar codes of conduct on monetary and financial policy.

The new economy, however, also requires much more transparency in the private sector. That is why we are urging the Organisation for Economic Co-operation and Development to conclude rapidly its work on a code of conduct for corporate governance.

Events in Russia—and, indeed, throughout the world—in recent months have identified inadequacies in our understanding of the interrelationship between financial markets and between countries, inadequacies in the quality of risk assessment, and gaps in the international regulatory system. There is an urgent need for us to look at the scope for a new Standing Committee and for global financial regulation.

We must also continue to be vigilant in regard to the threat of protectionism. It is perhaps most likely to arise in relation to the countries of south-east Asia, but—as the hon. Member for Hereford pointed out—it is crucial in terms of our own relationships with the countries of eastern Europe. We need to work with the World Trade Organisation to ensure that there is a proper start to the next round of trade negotiations, so that we can take the necessary steps to ensure openness in trade.

Last night—also in response to the Liberal Democrats—my right hon. Friend the Chief Secretary to the Treasury and I outlined the measures that the Government were taking, and had taken, to put the United Kingdom on to a path of stability. They are all the more important given the instability in the world economy.

One of the trigger points for that instability is the crisis in Russia to which the hon. Member for Hereford has so eloquently drawn attention. I assure him, and the House, that—both on behalf of this country and in co-operation with our colleagues in the G7 and the European Union—we will continue to do everything possible to assist the Russian Government to put their country on to the path of economic, political and social stability that its people so badly need.

Question put and agreed to.

Adjourned accordingly at twenty-eight minutes past Nine o'clock.