Russia's Economy: Timid Peek Ahead

The wave of euphoria from oil super-profits and the intoxication of brotherly hugs and kisses with the U.S. rolled on and subsided. Now we need to have a good look at what we are left with and what we can expect in the future. In other words, we need to see what if any chances we have of surviving in this cruel world. However terrible terrorists may be, if indeed they exist, it is hard to make us, sane people, believe that from now on everything rides on whether or not Bin Laden is apprehended. The economy of the U.S. seems to be gradually awakening after its post-September 11 stupor, Afghanistan quiet and obedient like a baby lamb, etc. However hard some people try to convince us of the opposite, our lives and well-being still depend on our own ability to make a living. In other words, be it under the old man Karl Marx or now, we depend on the state of our economy and we are nowhere near being able to dismiss it. Despite the optimistic vertigo Russia's and Western mass media are suffering, there are no unequivocal forecasts as to what our economy is in for. Normally prognostication is done through modelling something that develops. Yet a number of incidental factors may frustrate any and all efforts to have a peek into the future. The economic policies of our government are too chaotic to become a firm foundation for a sound estimate of the long-term prospects of our development. So what's left to us is rather establishing facts than making forecasts.

In most cases, the optimism of estimations concerning Russian economy has been confined to the following: 1) On the whole, ours has become quite a market economy; 2) While for now its growth is slowing down, the way things were in 2000 and 2001 allows hoping that stability is possible in principle, unless an insufficiently conscientious terrorist with explosives in his boots causes another confusion.

Yet market economy is not necessarily a synonym of effective economy. The eternal oppositionist Grigory Yavlinsky noted quite to the point that there might be no successful market economy where politics doesn't go hand-in-hand with protecting human rights and where there is no society of true citizens, as we call it. Yet such society is no more than an ideal to aspire to. In the meantime, economic growth that for a while looked unstoppable suddenly turned into a small stagnation. So today we have much more uncertainty than just six months ago.

Among other positive developments, Western analysts note the growth of the effectiveness of Russia's companies. Low investment activity looks quite adequate if we just look back to the unfortunate August of 1998, while the recent tax reform, the heightened budget discipline, and a number of new important laws illustrate there being at least a common tendency toward fighting chaos. Some foreign-made forecasts as to the development of Russia's economy seem even more optimistic than of our government. All seems good, yet only until we notice that the current situation is just a replay of 1994-1995. Of course, everyone remembers where we ended then.

In fact, the economic policies of the years 2000 and 2001 were mostly 'drifting with the waves'. Such is, for instance, the opinion of Mikhail Delyagin, the Director of the Institute for the Problems of Globalisation, who considers our success in those years just a positive echo of the devaluation of our national currency in 1998 and the risen oil prices. Now those positive effects have run out. The substitution of our domestic products for imports is slowing down. According to the forecasts made by the Vedi analytical laboratory, by 2005, foreign trade balance should be just half of that in the year 2000.

Too Much Money

According to Andrei Illarionov, the President's economic advisor, a new round of the devaluation of rouble may help the situation. Mr. Illarionov believes the fall of oil prices is beneficial because it cuts the inflow of dollars to Russia. This should result in the growth of exports and bring imports down, which, in turn, should naturally boost Total Internal Product. Yet is everything that simple?

The situation is rather paradoxical. On the one hand, we do not need too much money and rejoice the crash of our oil-related hopes. On the other hand, we exert ourselves trying to bring in investments. As many analysts believe, the reasons lie not in that dollars and dollars are different. The reason is rather in the inability of our economy to assimilate the money we get. This is why eliminating structural barriers must become the government's first priority objective. In order to break the magic circle of being dependent on exports, we need profound institutional reforms.

The Perspectives of Middle Class

Russia's internal market has an enormous potential. Those who hope to overcome the raw-stock orientation of our economy, which should bring real as opposed to incidental stability, are many. An important role in this is ascribed to the middle class and that is believed to be the cornerstone of our future prosperity. Why don't we, for starters, try and understand what are those we call 'middle class'. According to the estimates published in the Expert magazine, our hypothetical 'middle class' is now right where its American counterparts were in mid-60s. Yet the growth of its material well-being is limited by the excessive share of imports, the low rating of our national currency and our underdeveloped financial credit system. The continuing low productivity of the majority of Russia's companies and the deterioration of main productive assets curb our ability to curb the growth of imports.

True and Imaginary Problems

To reverse the situation we need responsible policies. According to the Expert magazine, V. Fadyeev believes that our government should worry about real rather than imaginary problems. The excessive strengthening of rouble or joining the World Trade Organisation (WTO), which has lately been chewed on so much, are among the least problems. No one says Russia should not integrate into the world economic institutions. The question is how fast and at what price? Can the benefits prove far smaller than the losses? We are aspiring to becoming equal partners there, yet the recent joining of the WTO by China shows that in truth not all its members enjoy equal rights. In any case, joining the WTO threatens us with an inflow of goods, which means the reduction of investments. What could be worse than that? Besides, joining the WTO will create additional problems with our integration into the European Union (EU) or any other such regional entity, and that may be far more important for us than the doubtful benefits of joining the WTO.

To many analysts the graduate adaptation of European institutions to Russia's realities seems to be the most rational strategy for our country. Prof. V. Mau, the head of the Working Centre for Economic Reforms, believes Russia could most naturally opt for joining the WTO. There are various economic, social, and cultural reasons. This is not the same as joining the European Union. The criteria Russia is oriented to are already rather tough. Following them, a partnership between Russia and the EU could take on rather developed forms in strategic perspective.

The Problem of 2003

The so-called problem of the year 2003 has long since become a bugaboo pessimists use to scare us with. It is the problem of foreign debt. Russia is required to pay a total of $17 milliard next year. The amount is by all means impressive, especially if compared with our budget. Strictly speaking, the problem is not limited to 2003. We will have to come up with annual payments of between $12 milliard to $19 milliard over the period from 2003 through 2008. And this is a serious challenge that may upset the illusory stability. Yet lately many have been saying the problem is not all that terrible.

Speaking on Wednesday at the Ministry of Finance, Mikhail Kasyanov, the Prime Minister of Russia, even suggested there was no such problem at all. Of course, a sceptical thinker won't just take this at face value. Yet authoritative Russian and foreign analysts join the consensus as to the forecasts made by the Centre of Development and the Expert magazine, all saying Russia's economy can handle 'the problem of 2003' rather easily. Well, let us live and see. And there is not much time left before we see it all. Everything is going to unfold right before our eyes. In any case, the government should concentrate of the partial conversion of foreign debt into domestic debt, which is not easy.

Not Enough Money - as Usual

The outflow of capital from Russia is traditionally named among the most serious problems hampering the sky-high growth of our economy and the unheard of prospering of our country. However, this situation is gradually improving. Even better, some experts predict the inflow of capital to Russia to an annual total of $5 milliard to $7 milliard as soon as around 2003. Everything stops at the measures necessary to maintain investment activity, some of them not just or even not as much financial as legislative, managerial, law-enforcement-related, etc.

Those Insidious Imports

High oil prices are similar to drugs in that you taste them once and you will want more and more. Yet despite their short-term beneficial effect, high oil prices may prove destructive as goes Russia's economy. This is why numerous are those who see the unfavourable situation with oil prices as a chance to do some structural reforming. According to Mikhail Delyagin, oil prices may keep fluctuating about the critical level till at least 2005. Just as a long-time junky, Russia cannot live without her oil-dollar needle. Well, most analysts believe the price of oil will not go below the fatal $10 or $12 per one barrel. More likely than not, the prices will keep at or above $18 per barrel. And that is the figure that assures we have no problems with our budget, that is, if one agrees with what Pyotr Aven, the President of Alfa-bank, said in his interview to

Whatever. We must gradually do away with our orientation toward exporting raw stocks. According to the forecasts made by Sergei Glaziev, the Chairman of the State Duma's Committee on Economic Policies and Entrepreneurship and a correspondent member of the Russian Academy of Sciences, if we continue to be exports-dependent, our annual economic growth may drop to 1% or 1.5% by the year 2010. And what little left of the growth will be mostly contributed to by raw-stock industries while the growth of industrial production may find itself in the red.

'New' Russian Economy

Everybody says the economic situation can be corrected only if we keep developing our scientific and productive potentials. Of course, this is a worthy objective, except how can we do it while there is not enough investment activity, the outflow of capital from Russia continuing and the debt growing? There are lots of people saying that in a few years our outdated equipment may begin failing avalanche-like. Some economists say the decade of reforming has, in effect, de-modernised the country. Some expect our complete infrastructure to fall apart over the time from 2004 through 2005. This will immediately affect the production of energy and gas industry, which are the most vulnerable to equipment failures.

Some analysts believe the development of economy has a choice of two directions. The first of these is modern hi-tech requiring lots of intellectual resources and less labour. Then there is agriculture, and we have plenty of natural resources to develop it. What we keep forgetting is the level of consumption. In the meantime, most family budgets are spent entirely on food. This is why we must ease tax burden on agricultural producers and those who process their products. Protective customs barriers would not hurt anyone either.

By the way, if we join the World Trade Organisation it may hurt our agriculture before anything else. And this is exactly the area where we are least likely to get any concessions from the WTO. In the meantime, according to Mr. Korolyov, a deputy director of the Institute of World Economy and Foreign Relations, agriculture is the very industry that may provide the so-called 'growth points', where investments are the easiest to obtain and which uses lots of the products of other industries.

And what shall we do about the development of science and technologies? The world's experience shows that today there is no effective and stable development of economy without innovation. Yet in Russia there are practically no policies directed at innovation. In the meantime, to use the favourable situation of the recent years to direct our development that way would be the most rational. We should also try and develop such effective trends as electronic commerce where there already have been some positive movement. What stands in the way of innovation is the insufficient number of computers, the lack of psychological adaptation on the part of administrators, the lack of venture capital, excessive semi-legal activities and the overall poor condition of Russia's industries.

And when will our economy leave the shadows? The problem of bringing Russia's economy, a considerable part of which is still 'shady', out to the light of legality is very urgent. Practically all Russia's business is either illegal or semi-legal to some or other extent, administrations corrupted. The problem can hardly be alleviated by half-measures like lowering taxes and customs duties. There are too many Russian companies the legalisation of whose operations would render them totally and catastrophically unprofitable under the existing conditions.

Getting out of the shadows is a problem of conventions. Economy can only be legalised all at once. Otherwise the shady companies will have great and unfair advantages. The government's hands are completely tied as goes the gradual legalisation of Russia's business. Obviously, such legalisation could not possibly be supported by any legal acts. In other words, victory over shady economy is so far away, it can hardly be seen.

Plainly, there are more questions than answers where the future of Russia's economy is concerned. We have been somewhat lucky yet the ineffectiveness of regulations still remains. Our future hangs on whether development remains incidental or becomes regulated - over the following years. The economic well-being of any country is reflected not only in the standards of living of her citizens but also in her international status. And missiles cannot support that. Rockets rust and become no good. Whatever one's weapons, there is always a better weapon someplace. And it belongs to someone else. We still have enough potential to spoil everything for the world without profiting from it in the least. Yet such potential comes and goes and once it is gone, who do you think will respect us?

Alexander Alexeyev, &to=' target=_blank>Rosbalt News Agency

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