Rebuilding Russia: Strong Economic Growth Creates Opportunities for Reform
Instead of the predicted economic stagnation, Russia 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.
Aug 20, 2003
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 stabilized 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 modernized 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 liberalizing 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.
The Financial Times
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 stabilized 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 modernized 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 liberalizing 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.
The Financial Times