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Russia: Putin's Rise Brings Concern But No Panic To Financial Markets

  • Michael Lelyveld

Boston, 12 August 1999 (RFE/RL) -- The sudden rise of Vladimir Putin to the post of Russia's acting prime minister has been met with concern but not panic on financial markets.

One reason is that markets have seen it all before. President Boris Yeltsin's political shuffles may have little shock value left for battle-hardened investors. Unlike the replacement of Sergei Kiriyenko last August, the firing of Sergei Stepashin did not follow an economic emergency. Although the future is unpredictable, the markets may hope that no economic emergency will follow the firing of Stepashin now.

Putin has indicated that he wants to keep Russia's existing economic team in place. On Tuesday, both the Russian stock market and the ruble recovered some of their lost ground. Some economists have voiced guarded optimism, noting that Putin, a former KGB official, was also once an aide in the reformist St. Petersburg government of Anatoly Sobchak.

Citing the past may be grasping at straws, but there may be reason to hope that Russia can avoid one of its periodic economic shocks with this government change. Despite Yeltsin's inexhaustible store of political surprises, investors may well wonder whether he has used up his supply of economic mistakes. Last year, Yeltsin flirted with non-market solutions, but the experiments ended in failure.

Following the crisis of last August 17, the government of Yevgeny Primakov conducted what appeared to be a genuine search for a new economic model. The central bank printed millions of worthless rubles before it reined itself in.

Sweeping renationalization of industry was proposed and considered. Price controls were discussed and, in some cases, imposed. All such measures were relics of proposed regressions from market economics that had previously been rejected in Eastern Europe, under the heading of the "Third Way."

But the economic wanderings of the Primakov government largely stopped when it became clear that the International Monetary Fund would have none of it. Russia's threat to destroy itself economically fell on deaf ears. The Stepashin government was saved from further default only after it affirmed the basic principles of market economics, even if all parties recognized that Russia would continue to fall short of its goals.

Despite the long record of crises and failures, the case can be made that there has been little new in the basic choices for Russian economics since 1991 when economic adviser Stanislav Shatalin devised his "500 Days" reform plan, which was considered but never implemented by Soviet President Mikhail Gorbachev.

Arguably, there have been even fewer changes in the choices since Yegor Gaidar served as acting prime minister of Russia in 1992, with his strict focus on monetary policy. The problems have been lax implementation, corruption and the sudden crashes like those of Black Tuesday in 1994 and August 17 of last year.

While the emphasis has been on Russia's crises, there have also been threads of continuity. Mikhail Zadornov, the former finance minister who led the recent negotiations with the IMF, was one of the contributors to the Shatalin plan, for example.

Throughout the disruptions, the central question has been about the economic tenets of Yeltsin himself. Critics see him as a power-driven politician without principles. Yet, his decisions to free prices and to privatize have changed Russia in ways that may never be reversed. Whether his actions have resulted from bad motives or poor advice, his legacy must ultimately be seen as one of failure, considering that Russia's economy is only half as large as when he took power.

But prime ministers like Putin, Stepashin and Primakov are likely to be only transitional figures. Without a professional economist at the head of government since Gaidar, the questions about Yeltsin's economics may be the most important of all, over time.

If the past is any guide, Putin may have little impact on the broad direction of Russia's economy, or its cycle of fiscal restraint followed by sudden collapse. But the past also suggests that runaway spending may precede the parliamentary elections in December and next year's presidential race.

Putin may have his chance to save Russia from another economic disaster if he shows restraint and can manage Yeltsin's political meddling. If not, the experience since August 17 may count for nothing, and the next crisis will leave Putin as just another name on the list of former prime ministers.