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Russia: Analysis From Washington -- Where Reforms Trump Resources

Washington, 6 January 1999 (RFE/RL) -- In the post-Soviet states, political and economic reforms are proving to be more important than location and natural resources in creating favorable conditions for both local businessmen and outside investors.

Those countries and regions which have carried out such reforms have outperformed those which have not -- even when the latter have the edge in resources and other traditional foundations for economic growth. And this gap between those who reform and those who do not seems likely to grow in the years ahead.

This conclusion, reflected in a series of reports released at the turn of the year, is likely to encourage those inside the region and beyond who have been pressing for reform and who believe that political reform is just as important as economic change for business to grow.

But it is also likely to raise new questions about outside investment in countries and regions blessed with extensive natural resource holdings or favorable geographic location but so far lacking the commitment to complete the transition from the communist past to democracy and free markets.

The most dramatic example of the impact of reform on economic performance is provided by an Economist magazine's Intelligence Unit (EIU) survey of business conditions in Russian cities outside of Moscow that was published in December.

The EIU survey concludes that the six best cities for business in Russia -- Nizhny Novgorod, Samara, Saratov, Yekaterinburg, Perm, and Veliky Novgorod -- have two things in common.

On the one hand, their leaders are committed to economic and political reform. And on the other, they lack the natural resources that many both there and abroad had expected would be "Russia's saving grace."

But as the survey pointedly notes, Russian regions which enjoy such resources and have far better geographic locations often allow the "easy money" they have received in the short term to become an excuse for making the kind of changes that will allow them to earn their way in the future.

In short, the EIU says, "politics, not petroleum" appear likely to determine where Russian businesses will thrive and where they will not.

The link between politics and petroleum also informs some recent studies of the economic prospects of Azerbaijan, Kazakhstan, and Turkmenistan, three oil- and gas-rich countries that had expected to outperform other post-Soviet states lacking such resources.

To date, that has not happened, and recent assessments by Western scholars and journalists that were summarized in The New York Times last Saturday suggest that these optimistic expectations may not be realized anytime soon.

As most of these studies acknowledge, a major reason for the lack of progress in these three states is beyond their control. Because of geography, they are not in a position to ensure that their enormous petroleum reserves can ever reach world markets.

And it is thus not surprising that most of the discussion in the West about these countries up to now has focused on the pipeline routes rather than on their internal political and economic situations.

But that is beginning to change, with ever more analysts focusing on the economic and political situations inside these countries. And this attention has highlighted three sets of problems that may make it more difficult for these countries to create the climate they need for future business development.

First, all three still face the problems inherent in a transition from surviving Soviet-era leaders who many argue have run roughshod over democratic principles to remain in power and who by their own design appear to lack a class of obvious political successors.

Second, all three face large and in some cases growing problems with corruption, with the overinvolvement of government officials in economic activities. While this is a legacy of the Soviet past, it is one that all three regimes have done too little to fight.

And third, all three paradoxically face the problems of an embarrassment of riches: Precisely because of the natural wealth they control, these leaders have attracted the kinds of preliminary investment that has encouraged them not to take the steps toward reform that they otherwise might have made.

For all these reasons, these three have performed much less well than several other post-Soviet countries, such as the Baltic states, that appeared to have fewer prospects but have in fact done better.

In the past, many analysts suggested that things would get better in Azerbaijan, Kazakhstan, and Turkmenistan once the petroleum began to flow to Western markets. But now, ever more people both in these countries and beyond are beginning to question their earlier optimism.

And they are beginning to focus on the need today for the kind of reforms that until now they had been willing to put off. That sets the stage for additional political and economic turmoil. But it may also help to create the kind of business climate that will allow these countries to participate in the benefits reformist states already have.