- The Washington Times - Monday, February 4, 2002

Norm L. Boyd, a top scout for new markets for one of the world's biggest farm-machinery companies, has no trouble coming up with reasons why investing in Russia is so frustrating.
The Russian government "has not put a high priority on land privatization," said Mr. Boyd, senior vice president for corporate development at Agco Corp., based in Duluth, Ga. "The old farm collectives are very inefficient, and the agricultural-lending market needs some serious reform."
But Mr. Boyd quickly added that his company has no plans to give up on selling tractors and other farm machinery in Russia.
"You look at the size of the fields and the quality of the soil," he said, "and you realize that this is a tractor market that has the potential to be as large as Western Europe."
All potential and no performance has long been the rap on Russia's economy. Gross domestic product slumped 40 percent in the first four years after the collapse of the Soviet Union in 1991. Just as the economy showed signs of life, financial mismanagement in Moscow led to the 1998 ruble crisis, which wiped out the savings of uncounted Russians.
Quietly, however, economists and policy-makers are once again turning bullish on Russia. Despite its negative popular image, the Russian economy has posted three straight years of solid economic growth.
Russia's economic health has a distinct political dimension. Relative prosperity and the feeling that things are getting better has given Mr. Putin room to press for painful reforms and provided political cover as he seeks to revamp foreign policy in the aftermath of the September 11 terrorist attacks.
Even a seemingly unrelated reform such as Mr. Putin's drive to slash the military size can be sold much more easily in a growing economy.
Mr. Putin has also tried to leverage his support for the U.S.-led war in Afghanistan into Western support for Russia's application to join the World Trade Organization.
Strong oil prices in 2000 and 2001 and the advantage to Russian exporters when the ruble fell in value provided a major boost. The big question among economists is whether Russia can turn its short-term advantages into lasting gains.
"We feel the sources of Russian economic growth have been put on a stable footing," Russian Prime Minister Mikhail Kasyanov told a large gathering of U.S. business investors here last week. "Our priority for 2002 is to further integrate Russia into the world economic system."
Anders Aslund, senior associate at the Carnegie Endowment for International Peace and author of an extensive new survey of post-Soviet economies, said he believes Russia under Mr. Putin has achieved a "critical mass" of reforms and institutions that will allow the economy to take off.
While Russia and the other nations of the former Soviet Union have lagged behind the economies of Central and Eastern Europe, which adopted far more radical reforms in the mid-1990s, "the semi-reformed economies like Russia can be expected to move ahead much more sharply in the coming years," said Mr. Aslund.
Moody's Investors Service, the financial rating firm, raised its credit rating on Russia in November from Ba3 to B2, praising Mr. Putin for breaking with the "crony capitalism" of his predecessor as president, Boris Yeltsin.
The yield on Russia's 30-year Eurobond, its most-traded public security, fell more than five percentage points last year meaning investors were demanding far less of a return in order to buy the bonds.
Polyconomics Inc., the supply-side consulting firm whose chairman, Jude Wanniski, played a major role in shaping the economic policy of Ronald Reagan, last month named Mr. Putin its 2001 Man of the Year.
The Russian president "confidently embarked on a series of supply-side economic reforms that have enabled Russians for the first time in post-communist history to see their living standards rise instead of decline even during the pronounced slowdown of much of the world's economy," said the Polyconomics citation.
"Much of this flows from his confidence in undertaking dramatic policy measures that would have horrified the bureaucrats of the International Monetary Fund."
In its own survey on the world economy late last year, the London-based Economist Intelligence Unit observed: "While the world economy has slowed precipitously this year, Russia's has gone from strength to strength."
Skeptics note that much of Russia's recovery has been fueled by rising oil and gas prices and by the artificial competitiveness of Russian exporters after the August 1998 ruble crisis. With oil prices falling and the world economy slumping, Russian growth is expected to taper off in 2002 to about 3.5 percent.
The bears argue that the recent fall in oil prices, the still-unreformed banking system and the persistence of capital flight from Russia all rank as cautionary signs.
World Bank economist Marcelo Selowsky, a co-author of a recent report on Russia and other post-Soviet economies since 1991, said the strong economic numbers for Russia lately "suggest that part of the improvement has been temporary and only part has been long-term."
He said Mr. Putin's government deserved credit in particular for weakening the "oligarchs," insiders who exploited the chaos of early privatization efforts to enrich themselves and slow the economy's overall progress.
The cynics also note that predictions that the Russian economy has "turned a corner" have been a staple of the popular press since the early 1990s and have yet to pan out.
Still, for the first time in a decade, the optimists have the numbers of their side.
Russian GDP grew by an estimated 5.5 percent last year, down from 2000's 8.3 percent increase, but a solid return in a year in which the U.S. economy fell into recession and many of Russia's Western European trading partners recorded modest growth at best.
Andrei Illarionov, considered Mr. Putin's most reform-minded economic adviser, told financial reporters in Moscow in December that the Russian economy is experiencing its best three-year period since the 1966-69 Soviet economy. Agricultural production rose by 6 percent last year, real incomes by 6 percent and wages by 20 percent, Mr. Illarionov reported.
Inflation last year was an estimated 18.6 percent, well above the government's target of 12 percent, but still a decline from the 20.2 percent recorded in 2000. Mr. Aslund said that the rate, though high, has not proven a barrier to other post-communist and developing countries.
"The record in the past has been that you have to get inflation below 40 percent a year and then you can pretty much forget about it," he said.
Russia's tax reform has also made it a darling of supply-side and flat-tax adherents throughout the West. With Mr. Illarionov's prodding, the government junked its high and largely ignored nominal tax rates in 2000 and adopted a single rate of 13 percent for individuals and 23 percent for businesses.
Economics Minister German Gref, during a Washington visit last summer, joked that the Putin economic team "might have something to teach the U.S. government" about simplifying tax systems. Finance Minister Aleksei Kudrin said last month that the Kremlin favors more tax reductions.
Another big question hovering over the Russian economy remains whether Mr. Putin and his team can retain the momentum of the past three years.
Among the reform items still in the legislative pipeline are land ownership laws, the bankruptcy code, corporate government rules, intellectual property rights, pensions, tariffs, currency controls, state rail, gas and power monopolies, banking and currency controls.
Mr. Putin's pronounced shift to the West in foreign policy in recent months has only intensified the high-wire act the Kremlin is pursuing, with a ready coalition of anti-reformers waiting in the wings should the economy sour.
According to the Jan. 14 Moody's report on Russia, Mr. Putin "has made proposals that are far in advance of the societal consensus on many issues, and inappropriate or inadequate responses from either foreign partners or economic agents in Russia could set off rumblings of discontent amongst various socio-political groups.
"Although the odds are that President Putin will continue to succeed in his various economic and foreign policy initiatives, his room for maneuver is also constrained by the varying interests and ideologies of different groups," the Moody's analysis concluded.
Mr. Illarionov recently warned there were "clear signs of impending decline" if the government failed to continue on the reformist path.
The Economist Intelligence Unit's medium-term forecast notes rising "doubts about the sustainability of the [1999-2001] recovery," citing weak investment outside the oil and gas industries, the slow pace of banking reform and falling international energy prices.
Capital flight also has not been stopped, despite Mr. Putin's vaunted reforms. The World Bank estimated that $10 billion fled the country in the first half of 2002.
Surprisingly, one of the most modest commentators on the Russian economy is the man who has benefited the most from it politically: Mr. Putin.
In a nationally televised New Year's Day address, a low-key Mr. Putin said that in 2001 "not all that was planned has been completed, and there are still more unsolved problems than accomplishments."

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