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.
