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Wall Street Journal
November 12, 2001
A Russian Revival

In the believe-it-or-not category of economic development, there is a new success story in the making, a place with one of the world's lowest income-tax rates but highest rates of growth. No, not Hong Kong. It's Russia.

OK, before anyone runs screaming from the room, we're the first to add a few caveats. In the 2002 Index of Economic Freedom discussed nearby, Russia still ranks as "mostly unfree," 131st among the 156 countries graded. But as President Vladimir Putin meets this week with President Bush, the good news is that Russia's economy is showing more signs of sanity and promise than anytime in the past decade (and maybe since Peter the Great). More intriguing yet, the turnaround began precisely when the West stopped trying so hard to help.

Recall that for most of the 1990s, the West threw money at Russia, dictating terms for reform while closing its eyes to what was really going on. Foreign investors piled in, assuming that their risky bets were guaranteed by the U.S. Treasury and International Monetary Fund. This charity gala ended in 1998 with an economic blowout that even a $23 billion IMF bailout couldn't stop. Russia devalued and defaulted. The foreign advisers and policy gurus finally left Russia to clean up its own mess.


With the subsidies turned off, the Russian government had to find some other way to pay for its upkeep. The Kremlin could no longer afford to spend time and resources working the Western aid bureaucracies -- filling out paperwork, lying to the IMF and watching as the borrowed cash vanished into Siberian space. It had to get the policies right on its own.

Which is what it has begun to do. By early 2000 Russia had roughly stabilized the ruble, and foreign reserves now stand at a cool $38.5 billion. The Kremlin finally got a grip on its budget and has even been running a surplus. Over the past two years Russia has paid off $10 billion of some $18 billion owed to the IMF -- and, even better, has refused fresh IMF assistance (if that is the right word for IMF advice). Despite a global recession, the Russian economy will expand this year by about 5.5%. Of course rising oil production, and the resulting tax revenues, have also helped.

Russia has even discovered its own version of the Laffer Curve. At the start of this year, Mr. Putin's government cut personal income taxes to a flat rate of 13% from a top marginal rate of 30%. And guess what happened? Russia's personal income-tax revenues climbed by more than 50% in the first seven months of this year over a year ago. The IMF, by contrast, had spent years telling the Kremlin to balance its budget by raising taxes.

Corporate tax cuts are scheduled to kick in next year, with rates dropping to 24% from a top marginal rate of 35%. Mr. Putin has also talked about reducing the country's 20% value-added-tax to rates at least slightly more tolerable. And last month, after years of false starts, the government passed a privatization reform that will allow the beginning of a normal market in non-agricultural land. Maybe Mr. Bush should ask Mr. Putin if he'd like to advise the U.S. Congress on its fiscal "stimulus"; he seems to understand tax incentives better than either Robert Rubin or Tom Daschle.

For all of that good news, Russia still has far to go to become a genuine tiger economy. The country has no functional banking system, no dependable rule of law and a legacy of default that left private creditors caught in the 1998 crash lucky to get 50 cents on the dollar. Mr. Putin wants his country to join the World Trade Organization, as China did this past weekend, but Russian policies are a long way from qualifying.

But what makes this round of Russian development different, and more hopeful, is that it seems rooted in home-grown reforms. Russia is off the global dole, is codifying and cutting taxes and finally seeking ways to liberate the talents of its own citizens. The proof of progress is that Russians themselves, wiser than anyone about their own economy, have finally begun to invest in Russia.

Whatever deal Messrs. Bush and Putin strike on missiles and foreign policy this week, a stronger, freer Russian economy remains the best foundation for a true U.S.-Russian partnership.

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