Latest Russian Crisis Bonus for Foreign Investors

[Deb Palmieri on Russia Table of Contents]

The following article was published in the Russian Commerce News, Winter 1993. The Russian Commerce News is the official publication of The Russian-American Chamber of Commerce®.

Latest Russian Crisis Bonus for Foreign Investors

Yeltsin dissolves Parliament and weeks later its supporters, led by Rutskoi and Khasbulatov, initiate fighting against what they condemned as an act of treason against the Russian state. Armorcd tanks roll down Moscow's main boulevards. Cannon shots fire into the Russian White House, leaving charred ruins. Nearly 200 are dead and over 500 wounded in Yeltsin's latest showdown with Parliament. After the dust and gunpowder settled, there was no doubt that Yeltsin, backed by the military, the Central Bank and most major Western leaders, came out on top. Rutskoi and Khasbulatov surrendered and then sat disgraced in the cold and damp Lefortovo Prison.

Does this monumental incident of political unrest and instability dampen the prospects for foreign investment in Russia? While the debate continues about whether Yeltsin resembled a democrat or an authoritarian dictator through his actions, there is little doubt that the outcome is a positive and a significant one for the West. Most experts agree that through his actions, Yeltsin routed the old communists who relentlessly opposed his market reform platform. That bodes well for foreign investment and business relations. As Yuri Petrov, head of Russia's State Investment Corporation commented, "Dissolution of the legislature could only bolster reform. The opposition always hindered the reform process. . . ." Yeltsin undertook an enormous gamble and won, and has temporarily suspended civil rights, disbanded the Constitutional Court and targeted other individuals and regional and local councils who opposed him, making the executive branch the only remaining power base.

The net impact of these actions for business is that the political gridlock has been shattered and future legislative support for reforms should be a guaranteed outcome, presuming Yeltsin's supporters show well in the mid-December parliamentary elections, which they are expected to do. Russian domestic support for the reforms was evident by virtue of the fact that the population did not rise to support the opposition, and waited with apprehension in their homes until the fighting was over. While mostly indifferent to politics, the Russian people are ready for stability, normal economic growth and will support a strong-arm leader who promises to deliver such a package of goods.

Significant also was the fact that ultimately the crisis only mildly affected international financial markets. Investors showed little sign of panic or loss of confidence in the Russian marketplace. While early on gold prices soared, oil prices fluctuated and stocks moved sharply lower in frenzied trading, as the crisis progressed, prices settled to pre-crisis norms and the market experienced little significant long-term impact.

Another important factor boding well for the market reforms is the return of pro-market former Prime Minister, Yegor Gaidar, as First Deputy Premier. In alliance with Finance Minister Boris Fyodorov, both men should craft policies favorable to securing Western economic aid and assure domestic policies to stabilize the economy and guarantee privatization and liberalization. Beyond that, Defense Minister Pavel Grachev has vowed that Russia will not disintegrate into another Yugoslavia or Lebanon.

Yeltsin has passed a crucial political test. This test scores an A+ for the favorable investment climate it creates in the long-term for Russia. Yeltsin exhibited his relentless determination to set Russia on a course of Westernization and signaled resolve to rely on foreign capital to transform Russia's sleeping economy into a locomotive force of the future.

Deborah Anne Palmieri
Russian Commerce News, Winter 1993