Is
that a miracle we see
with the Russian economy?
By
Jonathan
Power
October 18, 2002
LONDON - There used to be a joke told in Moscow: There
are two ways out of the Russian economic crisis: the
natural and the miraculous. The natural way is that the
Archangel Michael and his cohorts of angels descend to
earth and work 24 hours a day to save the Russian
economy. The miraculous way is that the Russians do it
themselves.
Perhaps it is too early to talk of miracles, but like
Poland before it (where this joke also went the rounds in
a Polish form) Russian has climbed magnificently out of
the abyss. No doubt it will stumble again, but the
indications are that the fundamentals of future success
are now being laid and that the Russian economy can be
said to have safely weathered the storms of its
transition from command economy straitjacket to
capitalist economy free spirit.
Just last week the Organisation for Economic
Cooperation and Development, a western intergovernmental
agency, removed Russia from its black list of countries
that tolerate money laundering. In the last couple of
years Russia has not only passed legislation to deal with
the issue, it has effectively implemented it.
For the past three years Russia has achieved an annual
economic growth of 6.5%, combined with a productivity
boom that Anders Aslund, the influential Swedish expert
of the Russian economy, describes as making " U.S.
productivity growth appear lethargic".
This time round the West must get its response right.
On at least two previous occasions in the last ten years
it has messed things up, once by under reacting and once
by overreacting.
The first time the West had a big chance to make a
difference was in 1992. President BorisYelstin, not long
in power, had appointed a highly intelligent economic
reformer as prime minister, Yegor Gaidar, who wanted to
transform the Russian economy, liberalizing commodity
prices, deregulating exports, unifying the exchange rate
and establishing market interest rates. Yeltsin and
Gaidar appealed to the West to help them, but the West
seemed only interested in discussing the paying back of
the old Soviet debt. Gaidar, effectively isolated, was
defeated.
Three years later, feeling rather guilt ridden about
its earlier mistake, the West geared itself up to help.
But this time there was no sensible economic policy in
place. All eyes and effort were fixed on the reelection
of Yelstin in the face of strong opposition from the
fascists on one side and the communists on the other.
Russia was considered too big and too nuclear to fail and
the resources of the International Monetary Fund poured
in, followed by a massive flow of private portfolio
investments.
Three years later on August 17th, 1998, in a totally
undisciplined environment the Russian economy crashed and
the rouble eventually fell to a quarter of its previous
value. Foreign investors ran away scared and burnt. But
the crash also brought to a shuddering halt the raping
and looting of the Russian economy that had been the
stock in trade of Russia's first generation capitalist
class who not only had made themselves rich had turned
the quite benign income distribution of Russia into that
of a pical Latin American country whilst financially
corrupting a large part of the Russian political
class.
The crash meant there was nothing left to loot: the
coffers of the state were effectively empty. This
translated into big losses for the big Russian
businessmen and because they could no longer milk the
state there was no way for them to win back the power and
influence they wielded before. But since then, as Aslund
observed in "Foreign Affairs", "Russia has grown more
serious". The old cultured Russia re-asserted itself and
with its highly educated middle class, proficient in
maths and engineering, it was primed to take advantage of
the Internet world. Bribery has plummeted as the
opportunities for practising it cost free have dried up
and under President Vladimir Putin the country and its
decision-making has stabilised. Moreover, the fruits of
privatisation- one of the more sensible policies of the
Yeltsin years- have become apparent. Soviet-era managers
have been replaced, companies have been restructured and
into the arena have stepped a new generation of
businessmen, often in their thirties, who regard the
making of money by entrepreneurship rather than asset
stripping and corruption the preferable road to take.
Interestingly these capitalists have not taken the
path many western advisers advocated, building up small
businesses as in Poland. Instead, they are working at
developing heavy industry, building sizeable
conglomerates that use the cash generated by oil or
metals businesses to invest in manufacturing companies
that they bought at knock down prices after the crash.
Although ruthless in sacking over manned workforces most
of them have leant support to Putin's plans for radical
tax reform and judicial reform. They tend to be pro
Western and open to bringing in Western managerial and
technical expertise.
The breakthrough is still tentative. The fragile,
war-prone, international atmosphere doesn't help, the
slow down in neighbouring Poland is a warning of troubles
to come and the working class is not yet benefiting as
much as the middle class but, nevertheless, the Russia of
today is barely recognizable from the early Yeltsin
years. At least the democracy and openness he fathered
meant that it was a little easier for Russia to learn the
hard way.
The Russians have shown they can do miracles. It just
cost them rather more than it should.
I can be reached by phone +44
7785 351172 and e-mail: JonatPower@aol.com
Copyright © 2002 By
JONATHAN POWER
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