The long ball and chain on Russian economic reform.

After so long as adversaries, it is difficult for Westerners not to maintain a cautious faith in Russian power. It is even more difficult for the Russians to regard themselves with anything less than faith in their nation. They have, after all, survived so much for so long. But contemporary Russian ideas of prosperity grew out of an expanding, if unsustainable, economy and expectations for more of the same. Prosperity by an emerging semi-marketized system, fashioned under the former head of State Security Vladimir Putin, relies more than ever on interactions across a maturing (i.e. sectoring) economy. To the average Russian, this new economy is both mysterious in it possibilities and strangely familiar in its fatalism. It is also smaller, less stable, just as exclusive and less humane than what Soviet-experienced Russians came to expect. Let us consider the material world of Russia entering the new Century:

* Through the 90s, Russia's GDP fell fifty percent. By comparison, the Great Depression U.S. economy fell thirty-three percent (in Germany twenty percent).

* Inflation has had an enormous effect since 1989, when one ruble was fixed by the government at $1.85. Today, it cost 29 2/3 rubles to buy a dollar. But that's not really the whole truth, because the January 1998 redenomination lopped three zeros from the ruble note. Therefore, in consistent units, a dollar really buys 29,666 rubles, and a 1989 retiree's savings of $20,000 equivalent is worth barely 36 cents now. That 1989 nest egg might not have gone as far in the United States, but it was enough for a comfortable retirement in Russia. It's nothing now, and pensioners commonly live hand-to-mouth.

* The circulating volume of Western currencies in relation to cash rubles is at least 100% in Russia, and the dollar operates as a de-facto parallel currency. One of Russia's latest social tears is between a new dollared elite and the ruble-earning underclasses.

* In recent years, some sixty million people are estimated to be working na-levo, or off the books. (1) Criminal gangs and corrupt bureaucrats extort up to eighty percent of private enterprises, (2) as well as (depending on which government estimate you prefer) somewhere between "more than a third" (3) and eighty-five percent of Russian banks. (4)

* $20-25 billion is illegally laundered out of Russia every year. And the current amount missing now reaches as high as $250 billion (5)--more than four times the 2002 state budget.

* From suicide and self-abuse, the male life span has dropped from 73 to 59, and Russia's population is shrinking at an unprecedented rate. Fifty-one percent of Russians think that it's best to have one child or no children under current economic conditions. (6) Even though there are 4.4 million fewer children in Russia than five years ago, ten times as many of them are infected with tuberculosis. (7)

Russia emerged from the Raspad (Breakup) with such promise for Free Marketeers, that Western governments plunged quickly, and deeply, into the task of opening and reforming Russia's economy. It seemed like a good bet at the time: Privatizatsia, marketizatsia and democratizatsia would naturally grow a working middle class, the Russian People would rally, and the hard-bitten economy would step into the light of market efficiency. Mineral and energy reserves were impressive, and resources legendary, Russians were patient and well educated. Their scientific community drove seemingly strong military and space programs. And there must have been something to that famous heavy-industrial sector.

By the end of 1997, such high expectations were looking at negative growth, sinking standards of living, a war between equally un-representative branches of government, and an even less tractable war with Russia's own Chechian Province. There was a collapsing infrastructure, a slumping military, a default on international loan payments, and growing mafia networks that only their families could love.

Then came the 1999 tripling of oil prices and a subsequent Y2K perk-up, following the January '98 devaluation which made Russian commodities cheaper on the world market, following the August '98 crash which pulled the plug on many government subsidies. (8) The Russian economy started growing--by an exciting seven percent in 2000 and by five and four percent in 2001-2. The government announced falling unemployment and inflation dropped to less than twenty percent by the end of 2001. President Putin even cautioned against "dizziness with success". But he also turned to shoring-up his gains, moving to simplify the unwieldy tax systems, establishing a tax-collector academy, reassigning federal administrative regions and putting his own men in charge of them. Russia recharged its arms and nuclear reactor sales abroad, entered the lucrative nuclear waste storage market, (9) and sold vacation time on the International Space Station.

Despite these recent gains, Russia's economy still bears a heavy set of handicaps. After such a long fall, practically any bright spot, (like a spike in the world oil price) could be expected to perk up the Russian GDP by five percent or so. But economic expansion is still unsteady and uneven. Why, as Mr. Putin has lamented, is Russia "stuck in a condition of sustainable stagnation as its dynamic for growth is disappearing." (10) With consideration for Russian industrial culture, geography and history, let us consider three reasons:

First, economic growth will not be based on manufacturing performance. The Soviet Union might have been the world's greatest steel producer, but manufacturing in Russia is still more hooked on subsidies than on profits derived from competition. This is natural. Under the Soviets, most manufacturing activity and about half of all state spending was military industrial. And the only spending was state spending. This sector produced obsolescing hardware for the constipated Gosplan (Central Planning Agency), which brokered exchanges between an empire of producers without quality computers or telecommunications, and without transparent banking or market indicators or even a free press.

Rather than bringing efficiency to manufacturing, privatization heralded a frenzy of downsizing and asset stripping and the collapse of investment in GDP--by eighty percent from 1982 to 2000. (11) Recapitalization in Russian engineering fell by ninety-five percent between 1990 and 1998, and the number of employed scientific researchers has declined by half. (12) In all, Russian privatization of state-owned enterprises amounted to little more than a transfer of assets at fire-sale prices. To contrast, privatization in Hungary raised $1253 per capita, while privatization sales of state assets raised a mere $56 per capita for the Russian economy. (13)

The privatization of state-owned enterprises was supposed to decentralize decision-making, and a concurrent marketization campaign would shake out the deadwood and attract foreign investors. Instead, manufacturing simply rearranged itself into the hands of another privileged group called the oligarchs--groomed in the Soviet Communist Party, capable of delivering trade, avoiding taxes, working with the mafia, and banking around the world. Even after the August 98 shake-out and the proliferation of small businesses in Russia--now said to be two-thirds of all businesses--those small businesses employ only ten percent of the nation's workforce, raise half that much in capital investment, and control not even half that much in capital assets. As it turns out, Russian economic power is extremely centralized, so that those rich enough to buy foreign consumer goods do so, and the rest spend very little for theirs. Caught in the middle, without enough customers or cash flow, are the domestic manufacturers.

As for the foreign investors, they came and for the most part set up small operations according to the whimsical currency laws and the best bureaucratic advice they could muster. Still, without tested norms of taxation, inspection, accounting, bribery, currency transfer, banking or even personal protection, some have now joined up with the oligarchial networks, while others hung on until August 1998 and then pulled out of Russia altogether. (14) Enterprises truly are going broke now--something that wasn't allowed for years And the Oligarchs and former Party Apparatchiki have mostly completed carving up Russian assets by now, and they may be almost ready for real Western partnerships. But so far, Russian manufacturers have not significantly reformed, recapitalized, or retooled.

Second, Russia's economy will not soon be saved by its raw resources. To be sure, Russian gold production is climbing again, and Russia has its famous oil and gas reserves. In fact, reminiscent of single commodity developing states, Russia's economy practically rides on the price of oil. (15) Indeed, oligarchs do grow rich on energy and minerals and will as long as prices are attractive and accounting is lax. Some eighty-five percent of Russian exports are natural resources, (16) and the commercial mining of natural resources, by its nature, concentrates decisions, so that the wealth and power of an elite few may never be known. (17) But just as predictably, the masses will not work in the oil industry. And Russian organized crime, official corruption, nationalist politics, an old-thinking workforce, and a dearth of corporate governance culture generally limit foreign direct investment even in Russian mineral and energy reserves.

And then there is geography. Remote Russia may make an attractive and lucrative radioactive waste dump, but more surely Russia's size, the severity of its climate and its infrastructural inadequacy undermine its competitiveness. How well can distant Siberian oil compete against the convenience of low delivery cost of Kuwait or Saudi Arabia, or Brunei? Why fight the infrastructure to extract timber from the Far East, when sellers are pushing better grades of it in Borneo, Canada, Brazil, Thailand and Alaska? Add to Russia's list of aggressive competitors the new technologies that make our metal cars less metal, our wooden homes less wooden and oil reserves ten times greater than they were fifty years ago, and Russia's short-term recovery almost unties from what still may become its long-term salvation.

Third, we might wonder, with life and the economy so harsh, why don't Russians form a People Powered movement, as Philipinos did in 1986 or Poles in 1989? One reason is that spontaneous networking--political or otherwise--is still very difficult in Russia, where there is not yet a mature homegrown civil society. Trade associations, grass roots civic and service organizations, telethons and the United Way have not validated themselves in Russia. Fraternal and charitable agencies, competing churches, legions of volunteers in hospitals, recycling centers, soup kitchens, cleaning up, pro-bono, coaching, reading, guiding, serving ... have not shown Russia their ability to help a nation from the bottom up. Environmental agencies, a civil liberties union, anti-discrimination law, liability law, contract law or even notions of private property ... are not accepted institutions in Russia. Certainly, there are Western financed farmer-to-farmer exchanges, medical outreaches, and naturalist clubs, whose works are making a difference. But few of these groups are strong, and those Russians who stumble onto them commonly mistake their missions for that of distributors of largess.

And yet, the Bolshevik Revolution demonstrated that at least some Russians would revolt then. Why not now? Another reason is that the Russian population is effectively shell-shocked. For three generations the Soviet police state repressed them. And for centuries even before that, the overwhelming power of the state was never checked as it was in the West by the Magna Carta, the Bill of Rights and the French Revolution. Neither individualism, nor entrepreneurism, and certainly not a coherent middle class has ever had much prestige in Russia. Russia never passed through the Renaissance or the Reformation or the Age of Enlightenment. In effect, Russia never left the Middle Ages. And true to form, most Russians are focused on just getting by. With a third of the population living on less than a dollar a day, (18) there isn't much energy or means left for revolting.

Another cause for public calm is that the capitalist world has a lot of interest in Russian progress, and none in revolution. Russia has an enormous foreign debt--dropping recently, but still around $140 billion. Steady growth is the way out of debt with continued good credit, and the International Monetary Fund and the World Bank are intent upon helping Russia get there. It's a high wire act to be sure, but the globalization of Russia's malaise brings with it a safety net. The whole institution of international development lending simply did not exist the last time Russia's productive economy was so depressed--when famine in the 1920s and 30s cost millions of lives. As long as the Russian Federation hangs together, nothing like that should happen this time.

It can seem as though little changes in the status of the average Russian. In the Tsarist era, only five percent of Russians served in the Imperial Court. In the Soviet Era, barely ten percent of the people joined the Communist Party. And today, again, just a small concentration of the powerful controls a tight circle of mafia, politicos and oligarchs. Their work is not valued for what it does, but for what it brings. It's a high society, known for conspicuous consumption of European luxuries if not for transparent business associations. Its leadership--together with most of Russia's wealth--is mostly in Moscow, where a rich core contrasts starkly with everywhere else in Russia. The rest of the people barter and moonlight, go to the factory when there is work, await their pay, grow and brew what they can at home and are otherwise whipsawed by events. (19) The two populations have little in common. Power does not devolve to the people, but re-concentrates to the Center. And the people seem to accept it all, especially with a strongman at the helm. In just the last year, Mr. Putin has lowered expectations of a free press, reversed President Yeltsyn's promise of greater autonomy for far-flung regions, personally selected a national anthem and assumed the undisputed center of political gravity in

Russia. His approval rating hovers near seventy percent. Russians are famous for muddling through. And mineral resources may continue to pull it along. But the new economy, rather than a shopper's paradise synonymous with Western prosperity, for most has a strong cashless-barter component. For many, economic contraction is by now almost irrelevant. Still, better standards of living for all will ultimately require a more efficient economy. For Russia's assorted challenges with embracing economic reform, ongoing and incremental adjustments by the state will intersperse with the occasional realization that something significant has happened. Economic expansion will, of course, correspond with perceptions of economic health, and foreign investors will or will not follow. All of this may keep the Russian economy on a bumpy path toward growth. But with such weak diversification and strong mistrust of institutions, Russia will be hobbled in its sustained economic recovery.

Endnotes

(1) Putin Economic Advisor Anatoly Kulikov. Obshchaya Gazeta, #30, August 1998.

(2) ibid.

(3) Prosecutor-General Vladimir Ustinov, Radio Free Europe Radio Liberty. 26 March 2001.

(4) Anatoly Kulikov, Russian Life. March/April 2001.

(5) Econ Devel & Trade Min German Gref. RFE-RL 21 Sept 2001 ("Izvestiya" suggests that the deteriorating international environment may prompt Russians to keep their money at home or alternatively to send even more abroad to safe havens.) President Putin. Financial Times. 4 April 2001, p 16; Prosecutor-General Vladimir Ustinov, RFE-RL. 26 March 2001.

(6) Russian Life. March/April 2001, p8.

(7) Literaturuaya Gazeta, 28 March 2001.

(8) Enterprise subsidies, 60% of GDP in 1998, dropped to 5-10% post crisis. (Strana.ru 11 November 2001)

(9) Academician Zhores Alferov, Chair Gov't Commission on nuclear waste mgmt. RFE-RL. 25 Sept 2001.

(10) RFE-RL. 17 October 2002.

(11) Reuters. 28 August 2000.

(12) Science Minister Aleksandr Dondukov to the Duma 14 Feb 2001. (RFE-RL. 15 Feb 2001)

(13) Ivan Ustinov, Nezavisimaya Politekonomiya, 17 April, 2001.

(14) In 2000, Russia attracted only about $3 billion in FDI, $2 billion less than the Czech Republic and barely 7% of the level to China.--Interfax-AFI, 26 April 2001. (RFE-RL 27 April 2001)

(15) RFE-RL. 27 Sept 2001. ("Nezavisimaya gazeta" reports recent declines in the oil price mean that RF revenues will be $10 billion under projected, & could bring dismissal of PM Kasyanov's government, including Finance Min Aleksei Kudrin.)

(16) World Bank. "Russian Economic Report--August 2003. p5.

(17) What is known is that, according to Forbes Magazine, at least five of Russia's eight billionaires are current or former oil and gas magnates. (Russian Life. September/October 2001, p8)

(18) One poll revealed that and only 30% of Russians could recall anything positive to have happened to them lately. Interfax, 19 April 2001. (RFE-RL, 19 April 2001)

(19) About 50 million people, or 34% of Russia's population, lives below the susbistence level. (Russian Life. September/October 2001, p7)

THOMAS R. MCCRAY, PH.D.

Science Department, Columbia College