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2001 In Review: As Many World Economies Plummet, Russia Looks Set To Take Off

In a year that saw the downturn of the world's major economies, Russia saw its economy continue to grow in 2001, as high oil prices kept federal coffers filled and a number of key economic reforms were put into action. Now, with inflation stable and officials touting an improved investment climate, Moscow has made accession to the World Trade Organization an economic priority. But much work remains for Russia, where some 40 million people still live below the poverty line. RFE/RL correspondent Kathleen Knox looks back at Russia's economic news of 2001 and asks what challenges the new year could bring.

Prague, 12 December 2001 (RFE/RL) -- Economically, 2001 was good to Russia, which marked its third straight year of GDP growth. But the year's biggest story for the Russian economy -- as for the rest of the world -- was the 11 September terrorist attacks on the U.S.

Before the attacks, global oil prices had remained comfortably high, keeping the Russian federal budget awash in cash. But after 11 September, prices fell sharply to below the $21-per-barrel average officials had budgeted for.

Crude oil, petroleum products, and natural gas make up roughly half of all Russia's export earnings. A recent report by the U.S.-Russia Business Council estimates that dropping the price of a barrel of crude oil by just $1 wipes $1.2 billion off Russian export revenues, about one-third of which goes into the federal budget.

Nik Malyshev is a Russia analyst at the Organization for Economic Cooperation and Development (OECD). He says although oil prices can serve as an accurate indicator of the Russian economy's fortunes, there is more to the Russia story than just oil: "Where the price of oil goes, so goes the economy. Russia is still a major exporter of oil and it has a really big impact -- especially on the fiscal side, on the government budget. So the budget was very strong during the time of high oil [prices], but now it's under considerable pressure with oil prices low. I would not, though, focus entirely on oil. I think there have been a couple of very key structural changes in Russia and those are quite important."

Of these, he says, perhaps the most significant is the new tax code that came into effect on 1 January. The code brought in a 13 percent flat rate for personal income tax and simplified procedures in a bid to boost tax collection.

Significantly, Malyshev notes that rising tax revenues this year indicate the new rules are actually being implemented -- a crucial sign that Russia is successfully enforcing the new code.

Malyshev puts land reform as this year's number-two key change. President Vladimir Putin signed a historic land code in October, making it legal to buy and sell land for the first time since pre-Soviet days. This will allow the sale of some 2 percent of Russia's 1.7 billion hectares of commercial and residential -- but not agricultural -- land.

Malyshev praised the passage of the controversial code: "It's meeting a lot of resistance in the countryside. It's met resistance in the Duma [lower house of parliament]. But this piece of legislation will profoundly change the economic landscape in Russia."

Another mark of progress this year is that barter is down. The U.S-Russia Business Council estimates that barter deals dropped to some 17 percent of total transactions earlier this year from 54 percent three years ago.

Still another plus: Economic growth is expected to reach 5.5 percent this year -- slower than last year's 8.3 percent jump but respectable by the standards of Western countries battling recession.

Real incomes -- or incomes adjusted to take inflation into account -- are also expected to have risen by around 5 percent this year. Public sector wage arrears were -- at least according to the official line -- almost eliminated. And hard-currency reserves are still healthy, at some $38 billion.

Another bright spot was the announcement by Finance Minister Aleksei Kudrin that Russia might pay its hefty Soviet-era debts to the Paris Club group of 19 creditor nations early and without rescheduling. In 2003, repayments on these debts will peak at $19 billion.

And instead of going cap in hand to the International Monetary Fund -- as it had done prior to the 1998 financial crash -- Putin said in October that Russia will manage to pay back some of what it owes that institution, also ahead of schedule.

"We are ready to start repaying the [IMF's] loans to the Central Bank ahead of schedule," Putin said. "Out of the total amount of the Central Bank's loan of $4.8 billion U.S., we are ready to start the active repayment this year and next of the loans that are due to be paid in 2003, a total of $2.7 billion U.S."

To be sure, falling oil prices could still cause difficulties in Russia, especially in 2003, when foreign-debt payments hit their peak. But early repayment would send a positive signal to foreign investors and would contrast sharply with Russia's position a year ago, when it demanded a write-off of some of the debt.

But analysts say Putin's economic record is still mixed when it comes to breaking the ties that bind politics and business -- as personified by the "oligarchs," a group of tycoons who bought up large chunks of the economy and held political sway during the administration of former President Boris Yeltsin.

Although Putin has taken steps to cut back the power of the oligarchs, the U.S.-Russia Business Council report says the Russian president seems to have been selective, targeting opponents -- like media moguls Vladimir Gusinsky and Boris Berezovsky -- while leaving other, more supportive oligarchs untouched.

In spite of the good news this year, some 40 million Russians still live below the poverty line, and the average monthly wage is still just $120. Russia still receives just a tiny share of global foreign direct investment, and corruption and bureaucracy continue to stifle business activity. Finally, much of the boost to the economy from the 1998 economic crash has now fizzled out. The ruble devaluation at the time made Russian goods cheaper, sending exports skyrocketing and forcing businesses to become more competitive at home as foreign goods became prohibitively expensive.

Still, Malyshev says, there has been some real progress in the economy that is not simply due to the 1998 effect or high oil prices: "I think there's fundamental improvement in the economy.... [T]he remonetization of economic activity [the drop in barter deals] is something that did not occur because of high oil prices -- that's a fundamental change in how the economy works. In the early days, I think the Russian economy benefited from the ruble devaluation. But now, though, the economy has matured a bit and some of this activity is more sustained."

So what might 2002 bring to Russia?

Economists expect the economy to continue growing -- perhaps by around 4 percent next year, as long as oil prices don't fall far below $18 a barrel. And one area of reform they say is in urgent need of attention is the banking sector. The European Bank for Reconstruction and Development (EBRD), in its latest transition report on the Russian economy, called this the "weakest element" in Russia's reform program. Regulation is weak, licenses for insolvent banks are rarely withdrawn, and asset-stripping is common.

Economist Yevgenii Yasin, speaking at the World Economic Forum in Moscow in late October, said, "If we don't have a more-or-less-decent bank system in the next two years -- let's not take into account what the oil price will be -- we won't have any growth in Russia, since the capital will be transferred abroad."

Another concern is improving the business environment to allow small and medium-sized enterprises to flourish by cutting red tape, a common source of corruption. And there are other, longer-term drags on growth -- like the demographic decline, which will shrink the workforce in coming years. Reversing Russia's population trends may prove even more difficult than pushing through remaining economic reforms.