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Russia: Some In West Doubt Economic Rebound

  • Michael Lelyveld



The latest Russian economic statistics seem to suggest that Russia is on the rebound. But western experts remain skeptical that Russians face better times ahead in the immediate future. RFE/RL's Michael Lelyveld reports:

Boston, 25 October 1999 (RFE/RL) -- Some western experts are skeptical about the latest reports of an economic rebound in Russia.

The news of a recovery came last week as Goskomstat, the State Statistics Committee, reported that industrial production in September soared 20.2 percent from a year before. Russia's industrial output in the first nine months of 1999 also increased 7 percent compared with the year-earlier period.

But the bad news is that output in September 1998 was down 14.5 percent from the previous September as a result of the August economic crisis, leaving the country with little or no net gain over time. A look back at the period that followed the collapse shows that the September decline was the worst performance in nearly four years.

In the first three quarters of 1998, industrial output dropped 3 percent from a year earlier. This year, Russian production can hardly be said to be growing. It is only recovering lost ground.

Even that highly-qualified recovery might be encouraging if it could be traced to a sound economic cause. But nearly all of this year's production increase is the result of the ruble's steep devaluation, said Keith Bush, director of the Russian and Eurasian program at the Center for Strategic and International Studies (CSIS) in Washington. Because fewer Russians can now afford to buy imports, domestic products have been enjoying an artificial boom.

The phenomenon known as import substitution has been supplemented by sharply higher oil prices. But even with the incentive to increase oil output, the rising prices have been a double-edged sword. Russia must also pay more for the gasoline and refined fuels that it imports as world prices climb. Bad management of resources and refining capacity may leave oil companies richer but consumers poorer as a result.

Even with higher oil prices, the dollar value of Russian exports is likely to decline slightly this year, while imports plunge by about 20 percent, according to the International Monetary Fund. With devaluation, cheaper Russian exports should be making inroads abroad, but the figures suggest that the country's products may be even less competitive than before.

The rise in Russian production might still be significant if it were a sign of improvement in the country's economy as a whole. Five years ago in Eastern Europe, the recovery in industrial output was a harbinger of strong growth in gross domestic product. Some of the sectors that were hardest hit after the dissolution of the East bloc were the first to show a turnaround.

In the case of Russia, experts doubt that conditions exist for a similar industrial recovery. In a CSIS report this month, Keith Bush describes the Russian manufacturing industry as a "gigantic rust belt," in which the average age of plants and equipment are about three times higher than the OECD average. Aside from arms, nuclear power and aerospace, there is little in Russian industry that can pass for competitive. CSIS estimates that renewal of outdated plants, equipment and infrastructure would cost hundreds of thousands of millions of dollars.

The amount far exceeds the entire Russian domestic money supply and the estimated amount of hard currency that citizens have hidden away. Clearly, foreign investment is needed for any major upgrading of Russia's industrial base.

Yet, Russia continues to attract less than 1 percent of worldwide foreign direct investment. Despite Russian claims in the past week that investment in the country has grown in 1999, CSIS believes it has fallen from about $2 billion in 1998 to about $1 billion this year.

Growing violations of shareholder rights have cast a pall over investment enthusiasm that would normally follow a sharp depreciation. The resignation this month of Dmitri Vasiliev as chairman of the Federal Securities Market Commission is seen as another blow to investor confidence.

The CSIS assessment also coincides with a study of Russian industry by the McKinsey Global Institute. The report, which examined ten industrial sectors, found that Russian production is being dragged down by a web of subsidies. Distorted tax rates and energy prices have been used to shield unreformed enterprises. While employment has been maintained, the system appears to have harmed productivity as a whole.

The long-term result seems to be that Russia has protected its companies as a substitute for protecting its citizens. This week, the government reported that 29 percent of the population lives below the subsistence level.

Economists predict a zero rate of growth in the Russian economy this year, which is in line with IMF forecasts. The flat performance is an improvement over the 4.6 percent decline in 1998.

But as the CSIS report notes, even if Russia were to achieve annual growth rates of five percent after 2000, it would still take about 15 years to get back to the country's economic level of ten years ago. So far, those higher growth rates are not even in sight.

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