Russia Basks in Glow of Successful Summer of 1997

[Deb Palmieri on Russia Table of Contents]

The following article was published in the Russian Commerce News, July-August 1997. The Russian Commerce News is the official publication of The Russian-American Chamber of Commerce®.

Russia Basks in Glow of Successful Summer of '97
. . . Will the Upward Trend Continue?

All things considered, and by just about anyone's assessment, Russia tallied a dizzying number of successes this summer. It was uncanny really, that so many touchdowns in the domestic and foreign arena could be scored so consistently and in a relatively short period of time.

On the domestic front, things finally seemed to be going the right way. The income gap between Russia's rich and poor narrowed for the first time in 5 years. Industrial production, for the first time in 6 years, registered an increase (.8%), primarily as a result of output by small firms and joint ventures. And that fact doesn't even consider the shadow economy, which is estimated at minimally $129 bn/annually and takes in almost 50% of the country's economic activity. The government made a dent in paying off pension arrears; the Russian stock market continued to soar at a breakneck pace; privatization of the largest monopolies went as scheduled (e.g. Lukoil and Sviazinvest) and Russia's foreign reserves were up - the Central Bank reported reserves increased from $15 bn Jan. 1 to $23.8 bn by the end of second quarter '97. Trade surplus grew by $2.2 bn to $11 bn (although foreign trade turnover in general slightly decreased). Yeltsin signed an important decree protecting the rights of investors in Russia's financial and stock markets. Of significance also was a strengthened anti-corruption campaign by the government.

Many Russian companies registered stunning performances. Gazprom ranked 146th in Fortune Magazine's Global 500 list of the world's largest companies - and was rated second on Business Week's list of 200 leading companies. Three Russians made Forbes Richest People in the World list (Boris Berezovsky, LogoVaz and ORT; Mikhail Khadorovsky, Menatep Bank; and Vagit Alekperov, Lukoil).

And to America's surprise, Lukoil, Russia's largest oil company, christened the opening of its own gas station chain in Virginia, marking the first Russian filling station in the U.S. and first large scale Russian investment in an American consumer retail enterprise.

But three key events stand out above all others. First, was Yeltsin's veto of a controversial law (passed by the Duma) restricting religious freedom in Russia. Prior to its veto, the U.S. congress voiced its strong opposition to the legislation and even attached release of its meager $200 mn foreign aid package to Russia to its demise. But Yeltsin came through again, despite enormous domestic pressures, upholding the Russian constitution and rights of religious minorities.

Secondly, of major importance was Yeltsin's complete overhaul of the Russian military, involving a massive scaling back, reorganization and reform of the Russian armed forces. It is truly the most comprehensive restructuring and military overhaul in the history of Russia/Soviet Union. The core reason? Yeltsin understands that the recovery of the economy is absolutely contingent on military reform and has acted resolutely towards that end. This development should lay to rest hawkish speculation about Russian military resurgence.

Finally, was Yeltsin's astonishingly mild reaction to NATO expansion and the expected outcome of the Madrid Summit. Russia simply held its breath, closed its eyes and barely uttered a cry as Poland, Hungary and the Czech Republic were nominated into the NATO family. The key word here is nominated, since these new members must be ratified and approved by the parliaments/legislative bodies of every NATO member. Yeltsin's strategic decision not to force a confrontation surely took this fact into account, as he realizes it isn't a fait accompli that the public in these countries, especially America, will blithly conceed to spending billions - certainly they will at least gulp and utter "we are paying how much to do what? . . . against whom . . . and for what?" Yeltsin's hoping the NATO debate, which will take off in spring '98, will force the issue of recognizing the outmoded and Byzantine structure of this Cold War institution and will provoke creative thinking on the impending issue of constructing a new international security regime. But especially, the NATO debate will call the question of defining the exact nature of the U.S.-Russian partnership next century and its economic and security foundations.

In matters pertaining to foreign affairs, Russia's performance was no less impressive. Denver's Summit of the Eight for the first time in G-7 history since 1975 included Russia as an equal participant in the summit proceedings. President Yeltsin stole the show with a showering of media attention and demonstration of his statesmanlike demeanor, along with the professionalism of the Russian delegation. This was followed by Prime Minister Chernomyrdin's visit to New York, where he addressed the U.N. and met with Vice President Gore, before leaving for San Francisco and then Beijing.

Russian foreign policy strategy clearly manifested itself this summer as being geared around an outreach to bordering neighbors and regional strategic partners to foster political goodwill and enhance economic ties. This explains overtures to Ukraine; Azerbaijan and other NIS countries; Boris Nemtsov's visit to Tokyo - where he and Japanese Foreign Minster Yukihiko Ikeda signed key cooperation agreements (Nemtsov even gave his home telephone number to Japanese business leaders to demonstrate his commitment and accessibility). He then left for Beijing to set the stage for Chernomyrdin's arrival. The Russian prime minister and Li Peng signed billions of dollars in trade and energy deals, including a $7 bn deal to provide China with natural gas from Siberia and others to provide electricity and a gas pipeline to China.

All of this demonstrates that Russia is on the move and is proceeding fast and furiously not only towards domestic reform, but towards regaining its great power status internationally. But this time that status is not founded on military might but on the basis of sound diplomacy and economic interdependence and a forging of a complex economic network with bordering states of the former Soviet Union, other key regional neighbors like China, and the West. The Russians are banking on the fact that these strategic links will accelerate Russia's recovery and establish vital long-term economic partnerships.

There is every reason to believe that this summer's trend will continue to year's end and beyond. There is absolutely no doubt about Russia's resolve and capability. In fact, this breakneck pace exceeds all expectations, even our own here in America.

Deborah Anne Palmieri
Russian Commerce News, July-August 1997