Can Putin keep Russia bubbling?

9 Apr 2004    printer version

The economy has stabilised remarkably since the catastrophic situation of 1998. The rouble has been rock-solid, barely budging from 31 in the dollar since 2001. Inflation, which was in three figures in the mid-1990s, is now a modest 12%. Interest rates, which hit 150% in the struggle to control the rouble in 1998, have been cut to 14% this year.

Confidence, that rarest of commodities, seems to be returning. During the 1990s, about $20bn a year was spirited out of Russia, mainly to safe havens in London, Zurich or Vienna. Last year, just $2.9bn left the country. Russian companies, too, seem to be investing more sensibly.

Foreign investors share the mood. Russia has been slow to attract serious amounts of corporate cash, but the flow seems to be increasing, especially from resource-hungry oil companies. BP, one of the keenest, now has 13% of its capital employed in Russia. In October, rating agency Moody's graded Russia as a low-risk investment.

Tax, legal and public-sector reform, much talked-about but wholly ignored during the presidency of Boris Yeltsin, is getting into gear. Taxes have been simplified, for example, and broadly lowered, especially for companies. And while the tax-loving Yeltsin government consistently ran heavy budget deficits, Mr Putin's finances are in surplus.

Those reforms are far from complete. Tax policy remains arbitrary and opaque, with officials seemingly free to threaten or favour whom they wish. Oil companies, the most prominent beneficiaries of the current boom, face an unfairly low tax burden, and their expert use of transfer pricing - a slippery method of tax-efficient accounting - means they avoid even that.

Russia's bureaucracy is still inefficient, overbearing and corrupt. Setting up in business, for example, requires fulfilment of 16 separate regulatory procedures, compared with three or four in Western Europe. Civil servants' salaries are low, making bribe-seeking more attractive. And little has been done to simplify the confusing layers of bureaucracy, with officials at federal, regional and municipal levels all keen to interfere.

"Our president is Putin" for the foreseeable future

Investors may be more chipper, but that is not saying much. Poland still gets far more foreign investment in a year than Russia has in its entire post-soviet history. Russia's stock markets are still casinos, its money markets are hopeless as a tool of state finance, and its banks are unreformed since their 1998 meltdown.

Russia has become more, not less dependent on energy exports in recent years. Now, energy accounts for one-quarter of economic output, according to the World Bank. This poses two dangers. First, that a downturn in oil prices will hit the economy hard. And second, that non-oil industries - which Russia must develop if it is to mature as an economy - are becoming ever more brutally crowded out.

Most troubling of all, the surge in wealth is distributed lumpily. Moscow and - to some extent - St Petersburg look like boom cities, with infrastructure developing quickly. Outside the twin capitals, conditions are decidedly grim, even in the dozen or so other cities of more than a million people. Unemployment, at an official 6%, looks low, but disguises chronic underemployment and wage arrears. Worst-hit of all is the public sector, where wages have not kept pace with inflation.

Vova broods on his destiny