10 October 2003 01:47
Russia on a roll: Only broad economic reform can make it sustainable
Russia's remarkable economic turnround since its debt default crisis of
1998 has this week been crowned by the Moody's rating agency decision to
award the country investment-grade status. This will encourage foreign
bankers, fund managers and companies to lend or invest more in Russia.
Nonetheless, they should still exercise caution in sinking money into an
economy so dependent on fickle world energy prices and so halting in its
progress towards further reforms. President Vladimir Putin illustrated this
point yesterday, when he lambasted the European Union's
"bureaucrats" for trying to "ruin" Russia's economy
by demanding that it raise its domestic energy prices nearer to world levels.
This demand is part of the long-running saga over Russia's negotiations
to join the World Trade Organisation. But Mr Putin may now feel further
reinforced in his resistance to the EU demand by Moody's upgrade, by the
recent western interest in Russia's oil sector and by the imminence of
elections. In fact, the only thing that might be "ruined" by
charging Russians more for their heating would be the prospect of a solid
pro-Kremlin majority in this autumn's parliamentary ballot and of Mr
Putin's smooth re-election as president next spring.
Of course, the gap between local and world energy prices becomes harder to
close the more the latter rise. But higher world energy prices have, along
with the rouble's 1998 devaluation, driven Russia's recovery. The
government has made good use of this. It has improved public finances by
pre-paying debt, building up reserves and creating a system of taxes that
people and companies are actually paying. But the country's dependence
on energy - which accounts for 15 per cent of gross domestic product, 55 per
cent of exports and half of government revenue - is somewhat unnerving. So,
too, is the fact that energy currently accounts for 70 per cent of total
market capitalisation of listed companies.
An equally serious distortion is Russia's corporate oligarchy of a dozen
groups that control 60 per cent of the economy. This is the result of the
privatisations carried out by Boris Yeltsin, and therefore not Mr
Putin's fault. However, there is a risk that further privatisations will
merely increase this concentration of ownership. The next big sale may be
parts of the UES electricity network. It now appears bidders for UES will be
able to pay in cash, as well as in the shares already piled up by several
oligarchs. But the only Russian bidders with the requisite cash are also
likely to be the oligarchs.
This puts a premium on outsiders introducing more competition into the
economy. So Mr Putin needs to attract more foreign investment. But he may not
be able to do this without resolving his uneasy truce with the oligarchs.
Moody's forecast this week that "political infighting . . . does
not threaten the broad direction of pro-market economic reform". It is
hard for others to be so certain on this score.
[FTI [The Financial Times]] |
RUSSIA IN FACTS
