- The Washington Times - Thursday, January 2, 2003

SKOPJE, Macedonia, Dec. 31 (UPI) — Russia faces more than merely a skewed wealth distribution or dependence on mineral wealth. Its difficulties are myriad. On cue from Washington, it is again being hyped in the Western media as a sure-fire investment destination and a pair of safe geostrategic hands.

But the truth is that it is a Third World country with First World pretensions (and nuclear weapons). It exhibits all the risks attendant to other medium-sized developing countries and emerging economies. External debt repayments next year will exceed $15 billion. It can easily afford them with oil prices anywhere above $20 and foreign exchange reserves the highest since 1991. Russia even prepaid some of its debt mountain this year. But if its export proceeds were to decline by 40 percent in the forthcoming 3-4 years, Russia will, yet again, be forced to reschedule or default. Every $1 decline in Ural crude oil prices translates to more than $1 billion lost income to the government.

Russia's population is both contracting and ageing. A ruinous pension crisis is in the cards unless both the run-down health system and the low birthrate recover. Immigration of ethnic Russians from the former republics of the Soviet Union to the Russian Federation has largely run its course. According to Pravda.ru, more than 7 million people emigrated from the Federation in the last decade.

Russia's informal sector is a vital, though crime-tainted, engine of growth. Laundered money coupled with reinvested profits — from both legitimate and illicit businesses — drive a lot of the private sector and underlie the emergence of an affluent elite, especially in Moscow and other urban centers. According to the Economist Intelligence Unit, Goskomstat (the State Statistics Committee) regularly adjusts the formal figures up by 25 percent to incorporate estimates of the black economy.

Russia faces a dilemma: to quash the economic underground and thus enhance both tax receipts and Russia's image as an orderly polity, or to let the pent-up entrepreneurial forces of the "gray sectors" work their magic?

Russia is scheduled to join the World Trade Organization in 2004. This happy occasion would mean deregulation, liberalization and opening up to competition — all agonizing moves. Russian industry and agriculture are not up to the task. It took a massive devaluation and a debilitating financial crisis in 1998 to resurrect consumer appetite for indigenous goods.

Farming is mostly state-owned, or state-sponsored. Monopolies, duopolies and cartels make up the bulk of the manufacturing and mining sectors, especially in the wake of the recent mergers and acquisitions. The EIU quotes estimates that 20 conglomerates account for up to 70 percent of the country's $330 billion gross domestic product. The oligarchs are still there. The banks are still paralyzed and compromised, though their retail sector is reviving.

Russians are still ambivalent about foreigners. Paranoid xenophobia was replaced by guarded wariness. Recently, Russia revoked the fast track work permit applications hitherto put to good use by managers, scholars and experts from the West. Foreign minority shareholders still complain of being ripped-off by powerful, well-connected business interests.

With the bloody exception of Chechnya, President Vladimir Putin's compelling personality has helped subdue the classic tensions between center and regions. But, as Putin himself acknowledged in a radio Q-and-A session on Dec. 19, this peaceful co-existence is fraying at the edges.

The president will try to reach a top-down political settlement in the renegade province prior to the 2004 elections, but will fail. Reform is anathema to many suborned governors of the periphery and the Kremlin's miserly handouts are insufficient to grant it a decisive voice in matters provincial. Devolution — a pet Putin project — is more about accepting an unsavory reality than about redefining the Russian state.

The economic disparity between rural and urban is striking. The EIU describes this chasm thus: "The processing industry is concentrated in the cities of Moscow, St Petersburg, Yekaterinburg and Nizhny Novgorod. These larger cities have managed the transition relatively well, as size has tended to bring with it industrial diversity; smaller industrial centers have fared far worse.

“The Soviet regime created new industrial centers such as Tomsk and Novosibirsk, but Siberia and the Russian Far Eastern regions remain largely unindustrialized, having traditionally served as a raw materials and energy base. Owing to the boundless faith of Soviet planners in the benefits of scale, one massive enterprise, or a small group of related enterprises, often formed the basis for the entire local economy of a substantial city or region. This factor, compounded by the absence of unemployment benefits, makes the closure of bankrupt enterprises a politically difficult decision."

The politically incorrect truth is that Russia's old power structure is largely intact, having altered only its ideological label. It is as avaricious, nefarious and obstructive as ever. Nor does the Russian state sport any checks and balances. Its institutions are suspect, its executive untouchable, its law enforcement agencies delinquent.

Russians still hanker after "men of iron" and seek tradition rather than innovation, prefer unity to pluralism, and appreciate authority more than individualism. Russia — a ramshackle amalgamation of competing turfs — is still ill suited for capitalism or for liberal democracy, though far less so than it was only 10 years ago.

Conspicuous consumption of imported products by vulgar parvenus is no substitute for true modernity and a functioning economy. Russia is frequently praised by expatriates with vested interests and by international financial institutions, the long arms of its newfound ally, the United States.

But, in truth, "modern," "stable” Russia is merely a glittering veneer beneath which lurk, festering, the old ills of authoritarianism, lawlessness, oligarchy, aggression, ignorance, superstition, and repression mingled with extremes of poverty and disease. Here is one safe prediction: none of these will diminish next year.

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