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#3
New York Times
November 18, 2001
At Last, Signs of Economic Revival in Russia
By MICHAEL WINES

MOSCOW, Nov. 17 — At last, Russia may be turning the corner.

Ask Yevgeny G. Peskin, vice president of IBS Group, an information technology company based in Moscow. He says Russian demand for computer hardware is growing at a 17 percent-a-year clip. Even better, demand for computer services is up nearly 30 percent.

"Things have been happening with mind-boggling speed since 1990," he said. "But in the last two years there was a massive change in the way business is done in Russia."

Or ask Yuri Levada. His National Public Opinion Research Center measures general optimism among Russian families, an index that has increased more than 35 percent this year, to its highest point ever.

"All the ratings of consumer behavior and social behavior are better," he said. "The average person's situation is much better than two years — or even several months — ago."

Andrei N. Illarionov, 40, the Kremlin's iconoclastic economic adviser, often prescribes more bitter economic medicine than his counterparts and frequently has been right. He prefers to withhold judgment on whether a turnaround is at hand.

"If you would start to conduct the wrong economic policy, then in a relatively short period you could destroy all these achievements," he said in a recent conversation. "It's like cycling. You have to push the pedal every day."

For most of the last decade, this country pedaled nowhere fast. After the collapse of Communism, much of Eastern Europe navigated a period of disarray and began racing toward Western-style prosperity and democracy. Russia, meanwhile, churned from crisis to crisis — too big to reform, some said; too inert or too corrupt, said others.

But perhaps it was merely too soon. For there is an abundance of signs this fall that Russia has reached — at long last — a crucial milepost that East Europeans attained in the mid-1990's: the status of a growing, politically stable and hopeful nation.

Russian experts say much credit must go to President Vladimir V. Putin, who imposed strict order on Russia's chaos and has pushed for free-market fiscal and social reforms. He was helped by the collapse of the Russian economy in 1998, which punctured the overvalued ruble, ended the dominance of imported goods in Russian markets and all but wiped out political opposition to overhauling the economy.

But the Russian people earn praise, too, for seizing on capitalism's lessons once it began to appear that talent and hard work were as quick a road to wealth as political connections or hired thugs.

"The real difference is people are talking now about business — about manufacturing things, making products or selling services, getting paid for it, real money," said Allan Hirst, the president of Citibank in Russia. "It's business — as opposed to before the crisis, where was lot of fizz and bubble and not much substance."

Mr. Hirst spent most of the 1990's in Poland, where leaders imposed wrenching economic and political reforms early in the decade to set the stage for growth. He said Russia today was roughly where Poland was in 1993 or 1994, a year or two before social and fiscal gains began barreling in. Russia could be on the cusp of its own Polish-style renaissance, Mr. Hirst said.

Like Mr. Illarionov, who fears that Russia could stop pedaling and slip back, many experts are not convinced of a rebound. Christof Ruehl, the top economist at the World Bank here, pronounces himself an optimist, but wonders whether Russia's economy — top heavy on big industry, short on small businesses that have propelled growth elsewhere — can really pull the nation out of its economic rut.

"In Poland, in the Czech Republic, in Hungary, 60 percent of employees are working in small and medium size firms," he said, a share comparable to that of Western Europe. "Then look at Russia. It's less than 30 percent."

There are other caveats. Russia's comeback so far seems confined mostly to big cities like Moscow and St. Petersburg, in part because the lack of a banking systen keeps money from finding its best uses. Mr. Ruehl noted that the ranking of Russia's top 200 companies had hardly changed since 1998 — an indication, he said, that business here might be less dynamic than the crowded shops might otherwise indicate. "It suggests that there is very little structural change going on," he said.

But Russians seem not to agree. For the first time since independence, they are betting serious money on the future.

One measure is the rate of capital flight — that is, the speed with which profits are spirited to offshore banks and other foreign havens rather than being put back into the economy. The less people trust the future, the faster money flees. Capital flight totaled roughly $1.9 billion in July 2000. Last July, according to the investment bank Renaissance Capital, based in Moscow, capital was still leaving, but only at a rate of $700 million to $900 million.

Indeed, bankers are actually beginning to see Russians bringing cash back home. "We've seen about $3.8 billion come back onshore in the last 12 months, and those are just deals we know about," Roland Nash, head of credit research at Renaissance, said in an interview. "It's now clearer and clearer that Russians have a sense of stability in the economic and political situation."

He added: "They feel that if they have assets, they are not going to be taken away by the state or by their competitors. They have an incentive to develop that asset."

After declining for eight straight years, investment crept upward in 1999, then surged in 2000 and 2001. Along the way, a huge and entirely new market for domestic products opened up after the ruble's collapse in 1998 made imports prohibitive.

There are flaws in this picture.

For one thing, while ordinary Russians' demand for consumer goods is increasingly fueling the latest revival, by far the dominant industries are the big exporters like oil, nickel and timber. Some experts despair that Russia will ever become an advanced economy as long as its main source of income is the sale of its natural resources.

In particular, oil and gas dominate Russian exports and tax revenues, setting the nation up for an economic fall when prices decline, as they now appear to be doing. Mr. Illarionov argues that that is not a bad thing: less dependence on oil, he says, forces Russia to compete better in others areas and to spend more wisely.

Russia's big investors are hardly Horatio Algers. By and large, they are Russia's oligarchs, the clan of wheeler-dealers who made billions — and impoverished millions of Russians — by stripping the government of its assets after the Soviet Union collapsed.

Now they are on a buying spree, snapping up farms, auto makers and auto-engine plants, oil companies, chicken processors, television makers, mobile-phone companies airlines and more.

Were that all, this latest asset-grab might resemble the oligarchs' original raid on Russia's prize assets. But experts say this time is different: the tycoons are plowing money into industries that are undervalued or hobbled by Soviet-style managements.

The strategy is to turn a quick profit by making the businesses leaner and more modern — which, coincidentally, is precisely what the Russian economy needs.

"Three years ago, they were grabbing assets, but there was no restructuring going on," Al Breach, a Moscow-based analyst for Goldman Sachs, said in an interview. "It was a pure financial play. Today it's a consolidation of ownership. They're running these companies."

As Mr. Peskin of IBS Group, the computer services company, can testify, that strategy spins off benefits far beyond wealthy oligarchs. Nowadays many companies want their financial transactions to be accountable and out in the open. "I don't want my middle managers stealing from me," he said.

The next thing they need, he said, is technology, because computer equipment is often obsolete.

Mr. Peskin's company now employs 1,500 people and boasts accounts in 84 of Russia's 89 provinces and the United States. It has even begun hiring programmers in Omsk, a remote Siberian city with a wealth of technology workers idled by the decline of Russia's military-industrial complex.

The barter economy that once dominated Russian industry is vanishing: with a reliable currency and increasing wealth, companies no longer need to pay for steel pipes with tires, or trucks with steel cable.

RAO UES, the nation's electricity monopoly, once received less than a fifth of its revenues in cash; the current figure is close to 90 percent.

Nobody would say Russia has become altogether modern. This nation is still haunted by shocking rural poverty, critical health-care and welfare failings, a ramshackle infrastructure that will cost untold sums to repair and, too often, to scrap and replace. Inflation approaches 20 percent a year.

Just how far the mighty Soviet economy fell can be measured with a number: officially Russia's gross domestic product last year was about $300 billion. That is slightly more than Michigan. The average Russian is only starting to approach the level of real income enjoyed when the Soviet Union fell 10 years ago.

But those numbers can be misleading. The gross domestic product does not count a truly vast underground economy that is slowly emerging as business conditions improve and tax laws become rational. Nor does it measure the extent to which Russia is operating on the cheap: were its goods and services priced at American levels, gross domestic product would be closer to $700 billion.

And of course, no one can measure potential, though many try. Mr. Levada's polling center publishes a "social feelings index." On a scale in which 100 is the midpoint between pessimism and optimism, Russians in late 1998 racked up a 58. In September, in the latest survey, they registered 137.

"It's definitely not heaven," Mr. Peskin said. "And it's not going to be for a long time. But look at U.S. history: it was two centuries, and we've had to compress it into 10 years."

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