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The
Russian economy is much
better
than was thought
By JONATHAN
POWER
August 22, 2001
LONDON - Three years ago this August the Russian economy
blew up, sank and seemed as unsalvagable as the Kursk
submarine. Economists and money-men told us it would be
the best part of a decade before Russia would find its
feet, yet here we are with a vital, pruned down, but
effervescent economy. This week the cautious Lex column
of the Financial Times recommends it as a place to start
to invest again: "Its twin surpluses (current account and
budget) and lack of need to issue debt bolster resistance
to Argentinean flu".
The fall was overrated. It was not quite so dramatic
as the statistics then suggested. "Almost by 50%", as was
said at the time, was a wild overstatement reflecting the
padding in the old Soviet economy, which three years ago
was still producing what nobody wanted to buy. The
subsequent decline in the production of what had become
useless goods was in fact a welcome shakeout. So too was
the demise of much of the old time barter economy, an
inefficient but long held practice. At the other end of
the scale, official statistics were not measuring the
much more robust black economy that managed to survive
better than the official economy.
Strobe Talbot, President Bill Clinton's point man on
Russia once decried the effect of Western imposed belt
tightening and the application of economic rigour in
return for IMF loans as a kind of shock therapy that
contained "too much shock and not enough therapy". Yet
after the collapse of the Soviet Union it was necessary
to take the fast track to price liberalization and
privatisation. Those in the Soviet sphere who took their
medicine most- Poland is the prime example- have moved
the fastest. Under Yeltsin there was too much corrupt
state therapy in the form of subsidies to the country's
elite. The crash performed a useful service in that it
cut the financial wealth and political power of the
corrupt oligarchic tycoons and the regional governors.
The problems that still exist in this new era of
resurgent economic growth- 8% last year, 4% this -
excessive state intervention, corruption, high tax rates,
lingering inflation- all require a bit more shock and
rather less therapy.
The sinking of the Kursk and the fire that consumed
the Moscow television tower convinced many on-lookers
that Russia's infrastructure was coming apart at the
seems. The opposite in fact was true. While the old
Soviet Union had a notoriously bad record on
infrastructure improvement, things have gone into reverse
in recent years. Thanks to privatisation and free market
competition there has been an incredible expansion not
just in telecommunications but also in the improvement of
airports, airlines and ports. There has been a widespread
building room. The great laggards in maintenance and
investment remain the remnants of the old economy- such
as Gazprom, the state owned pipeline natural gas
monopoly.
Indeed, despite the continuing problem of capital
flight, Russia has today a higher investment rate than
the U.S. It has no great need for foreign capital, albeit
it does need foreign expertise and it does need stronger,
safer and more honest legal and law enforcement system if
it is to attract back that flight capital and to make its
newfound economic growth sustainable.
Flight capital runs at an estimated $20 billion a
year, which is a useful statistic when putting western
aid into perspective. In terms of disbursements Russia
has been receiving only about $200 million a year from
the U.S. and $150 million from Europe. (This does not
include the more self-interested American food aid and
finance for denuclearisation.) As for the $15 billion in
stabilization credits drawn from the IMF and $12 billion
from the World Bank, Russia has to pay this back, and
with interest too. Indeed western financial help to
Russia since the end of the Cold War is peanuts compared
with its savings on reduced military expenditure, which
in the U.S. was the reason why the enormous budget
deficit was wiped out so effortlessly.
At minimal cost western aid has contributed a lot- it
helped make the rapid privatisation possible and it
helped encourage a profound change of course in Russian
thinking. The only pity was that it didn't start earlier-
President George Bush senior sat on his hands while in
early 1992 Russia had a government under Prime Minister
Yegor Gaidar that was not only the most serious of all
Russian governments about economic reform but was clean
and idealistic.
Perhaps under President Vladimir Putin Russia is
edging back to this more pristine time, even if the
thickets of corruption and misplaced economic power that
have mushroomed in a decade are tremendous hurdles to
overcome. Putin has set in motion a series of prudent
policies for the long-term rather than using Russia's
current oil windfall for a spending spree. Income tax
reform is at last producing comfortable government
revenues. Better relations with the Dumas, the Russian
parliament, is enabling a rush of structural reform
legislation onto the statute book.
"August is a risky time to be positive about Russia",
concludes the Financial Times. This is true if you are a
small western investor. But for the Russians themselves
and indeed for well-informed, shrewd, western investors
this must be a time of hope. Russia, at last, could be
going somewhere.
I can be reached by phone +44
7785 351172 and e-mail: JonatPower@aol.com
Copyright © 2001 By
JONATHAN POWER
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