April 2000 - Glimmers of Hope in the Russian Economy

Russia's stock market rose 5% and the rouble strengthened on the news of Putin's victory in the presidential elections.  With Putin preparing to use is election mandate to banish corruption and draw up new laws to win desperately needed investment.  

Western businessmen in Moscow have said that they are ready to pour investment into Russia because Mr Putin's victory would bring political stability.  

Since the beginning of the year the economy has been picking up steadily, commercial Soviet-era debt has been restructered and share prices have increased sharply.  There are also other signs for optimism: Russia has just repaid back a further £38.5 million of its debt to the International Monetary Fund, and production in five core economic sectors was reported to have risen by 10% in January and February.  

In addition there are signs that some Russian capital, spirited abroad over the last ten years, is being repatriated.  Perhaps the oligarchs have begun realise that, as there is very little left to steal, they must reinvest and add value to Russian businesses if they are to make more money for themselves.

Since the 1998 Crash

Russia's economic collapse has not been as bad as most economists expected in the immediate aftermath of the rouble devaluation and the government's default on domestic debt in August 1998.  Certainly, the early forecasts of disaster have not materialised.  

After a big leap following devaluation, inflation has stabilised somewhat.  The succession of governments since 1998 have maintained fiscal and monetary policies that have been fairly tight and consistent.

Once described as the worst central banker in the world, Mr Gerashenko was reappointed governor of the central bank, which has done its utmost to limit the inflationary impact of the devaluation.  It introduced surprisingly efficient restraint over capital flight and limited the printing of new money.

Local firms have reaped the rewards of the massive rouble devaluation which priced foreign goods out of the market and sent industrial production soaring.  However, oil prices remain the single most important factor behind the country's economic performance.  Oil prices have more than doubled since the devaluation and consequently so have Russia's revenues.

Russia has an opportunity to support economic growth in the near future from the windfall of high oil prices.  The government should not be lulled into a false sense of security and do nothing - it must act quickly to reform the economy before a cruel twist of fate sends oil prices plummeting.

The IMF has identified the structural problems of the Russian economy to be addressed:

•

Subsidies, widespread tax exemptions, and the tolerance of non-payment of taxes which allow bankrupt companies to keep going, destroying rather than creating value.

•

Federal and local government expenditure arrears, contributing to the spread of non-payment and barter;

•

A bankrupt banking sector; and

•

Poorly enforced property rights and a weak legal system.

•

Poor corporate governance and treatment of minority shareholders.

On the positive side there signs that Russia's endemic barter system is losing ground to healthier cash payments, monetisation of the economy is increasing while arrears and barter are falling.

Russia's size, its 147m population, the strength of its education system (and consquently its well trained and educated workforce) and the poorly developed market system outght to offer enormous potential for foreign investors.