20 August 2003 15:24
Rebuilding Russia
Five years after the 1998 financial crisis, Russia has confounded the pessimists. Instead of the predicted economic
stagnation, the country is enjoying its longest period of sustained growth for decades. Gross domestic product is
expected to rise by more than 6 per cent this year, putting Russia among the world's top performers. Western
bankers who fled Moscow five years ago are now flocking back.
And yet a sense of insecurity still pervades the Russian economy. The huge gap between rich and poor, the grinding
poverty of millions, crime, corruption and disease afflict even the wealthiest cities. Although much has been
accomplished in transforming Russia into a stable modern economy, much more remains to be done.
President Vladimir Putin, who took over in 2000 from Boris Yeltsin, his bold but chaotic predecessor, has stabilised
the economy and the public finances. He has reasserted the Kremlin's authority, implementing useful reforms such as
a 13 per cent flat-rate income tax. Meanwhile, some of the biggest companies have modernised their businesses and shed
light on their financial affairs. The Russian marketplace has become more transparent.
But the current boom owes more to the surge in world prices of oil and gas, which last year contributed more than
half of Russia's exports and nearly half of government revenues. The 1998 devaluation of the rouble helped to
spread the benefits through the economy by stimulating local production.
But inflation, powered by rapid wage increases, has eliminated most of the devaluation benefits. Although energy
prices remain high by the standards of the 1990s, the good times may not last. Mr Putin must rapidly implement new
market-oriented reforms if he wants the current expansion to continue.
Top of the agenda should be liberalising the banking and utilities sectors. UES, the electricity giant, is lumbering
towards reform. But Gazprom, the gas monopoly, remains under state control, as does Sberbank, the dominant bank.
The Kremlin is worried that opening the doors to private capital will simply hand more economic power to the business
oligarchs who dominate the extractive industries and much else.
One answer is to encourage more foreign investment. Russia has so far been cautious about admitting multinationals,
unlike other ex-communist states such as Poland. But foreign capital may be the only adequate private sector
counterweight to the oligarchs.
Mr Putin must also do more to promote the rule of law. If Russia is to develop an open economy, ordinary Russians
must feel the courts will protect them against the powerful.
With parliamentary elections due this autumn and presidential polls coming early next year, Mr Putin is unlikely to
act precipitately. But if he and his supporters win the elections as expected, he must take advantage of the favourable
economic climate to press ahead with reform. The good times may not go on for much longer.
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