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1999 In Review: A Bit of Growth, But Not a Recovery for Russia

The last year has witnessed a rebound in the fortunes of the Russian economy. However, many analysts say that it was driven more by a rise in global oil prices than by a change in Russian economic policy. In this year-end report, RFE/RL correspondent Floriana Fossato looks at the state of the Russian economy and at its prospects in the coming year.

London, 27 December 1999 (RFE/RL) -- The crash of the ruble in August, 1998, cut Russia off from world financial markets. And a year ago, analysts were discussing whether the Russian economy was heading into its final collapse -- or whether it was preparing for a grand leap, with the government finally choosing to undertake far-reaching structural reforms.

Helped by a 70 percent devaluation of the ruble in 1998 and by growing world prices of most commodities, the country's economy is expected to post growth of two percent in 1999, with industrial production gaining a healthy five to seven percent.

But economists say the government did little in the last year to create the foundations for further growth. Russia remains plagued by corruption, lack of infrastructure, and lack of a firm legal framework. These problems discourage investment, and have created huge disparities between industries. Instead of an overall improvement of the business climate in Russia, 1999 saw a number of rather isolated companies and industries emerging as success stories.

Brigitte Granville (eds: a woman), head of the International Economic Programme at the London-based Royal Institute of International Affairs, has been a top economic adviser of pro-reform Russian governments in recent years. She tells RFE/RL that this year's news is not all bad -- the various cabinets that were in power showed more economic restraint than was expected. Notably, she says they did n-o-t engage in an uncontrolled printing of money which would have fuelled hyper-inflation. But Granville remains critical of the overall economic policy of the government. She says the rise in the price of oil helped ease budgetary problems. But she says in terms of economic policy, nothing has been achieved in 1999.

Other analysts agree and say that, despite some success stories, there is little likelihood that growth can continue. Katinka Borysch is an analyst at the London-based Economist Intelligence Unit. Borysch says: "There is too little investment. Domestic demand remains extremely weak. So, I would say [that there will be] perhaps a one percent growth next year -- probably not much more."

While the 1998 financial collapse triggered a resurrection of production industries this year, it took services and banks quite a while to start recovering. And the stock and bond markets, nearly dead after the crash, are still awaiting revival.

In Russia's oil industry, the picture is suddenly very different. Oil prices over the last 12 months have more than doubled, as the world's leading producers from the Organization of Petroleum Exporting Countries (OPEC) cut production to shore up markets. Prices were recently pushed to their highest in nine years, at nearly 26 dollars per barrel.

Oilmen all around the world are enjoying fresh profits, but for Russia they come as a real windfall, as the country's producers are seeing not only higher prices, but also lower production costs. An average Russian oil company pays more than four-fifths of its costs not in dollars, but in rubles, as it uses domestic -- rather than imported -- equipment and services. The ruble's fall cut costs across the board.

Fresh wealth in 1999 didn't make Russian companies stop complaining about excessive taxation. It didn't stop capital flight either. Companies are still hiding money in elaborate offshore labyrinths from the taxman, and often from persistent creditors.

According to the EIU's Borysch, capital flight is set to continue, or even worsen, at least in the first part of 2000. Borysch says: "Capital flight will certainly continue, or even accelerate, at least until the presidential election [of June 2000.] The political scene remains very uncertain, now even more, because of the war in Chechnya. There may be some capital coming back next year, if the stock market performs well, but this is minuscule, compared to what is flowing out of the country every month."

As producers of raw materials were busy pumping abroad as much of their output as possible, a whole different business strategy revitalized the domestic consumer goods industry, such as cars and food. In a seeming paradox, it was the reduced buying power of average Russians that made some domestic industries flourish.

That is because the ruble's crash all but wiped out imports. Swings in the currency rate and shrinking Russian incomes in dollar terms scared away importers. Domestic producers were quick to fill the gap. The food market was especially promising, as it could take advantage of a resurgent Russian belief in the superiority of "naturally grown" domestic food over what are now seen as "artificially grown" imports. Russian food producers just had to keep quiet about their use of Western technologies and their partial foreign ownership to attract buyers. Russian carmakers, too, did quite well. Russians could no longer afford better, imported cars.

Quite naturally, industries lacking consistent markets either abroad or at home suffered the most from the ruble's collapse. The heavy machinery industry -- particularly, military plants -- as well as the subsidy-addicted agriculture industry, were dealt a blow. Economy Minister Andrei Shapovalyants said decline in those sectors could slow or even halt the overall economic growth.

Paradoxically, capitalism's front-runners found themselves in the same boat as Soviet-era bankers and dealers in Russian bonds. The government's default on its domestic debt killed the government bond market, and its default on the Soviet foreign debt meant that nobody will be willing to take on Russian debt for the foreseeable future.

The default also scared investors off Russian equity. Even though Russian shares have surged this year, making the country the best-performing emerging market, the minuscule volume of trade -- averaging a couple of million dollars a day -- testifies that, in reality, the market is still in a coma.

There are, however, a few signs of life. Borysch of the Economist Intelligence Unit says the stock market may be coming back -- but she warns that does not mean the economy will follow. She says: "I suspect the stock market will grow -- continue growing -- healthily next year, because people are ... getting more enthusiastic about Russia again. Obviously investors' memory is short. We do expect more money flowing into the Russian stock market next year. But Russia's stock market does n-o-t play a role in the economy. It is really hardly a way for local companies to access fresh capital. It remains highly uncertain, rules are not properly enforced, transparency is an issue. But, yes, some high risk investors will probably come back, as I said, even some local capital may be repatriated and put into the market if we do see the rapid rise at the beginning of the year that some people are expecting. But in terms of the economy, the performance of the Russian stock market is not very meaningful."

With the "real economy" on the rise and a timid, but existing, stock market, the outlook for next year should seem positive. The problem, though, is that Russian producers, whatever profits they make now, have far too much restructuring to do and far too little money to do it with.

The money can only come from abroad. But only a trickle of the fleeing Russian capital ever comes back. And with new frosty winds blowing between Russia and Western lenders, particularly the International Monetary Fund, new money will likely be slow to arrive.

Critics say that the government's economic policy -- in the fiscal sphere, structural reform and protection of investment -- is nearly absent from this picture, because it is largely divorced from reality. The economic growth that has occurred is based on certain industries and companies, not on a general economic recovery. With the shadow economy still a larger factor than government policy, the economic outlook for Russia in 2000 is not auspicious.