The Keys to Russia’s Successful Recovery

Deborah Anne Palmieri

By just about anyone’s standard, Russia has embarked on the road to recovery following the collapse of empire and disintegration of the Soviet Union, and the devastating financial collapse of August 1998. In early 2002, GDP grew 3.8%, a slight increase over the same period the previous year. Most analysts are optimistic that Russia will maintain a steady GDP rate, not only for 2002 but in the years to follow. Household consumption and consumer spending are holding strong. Other key growth indicators such as industrial output, are showing steady growth, even if by small numbers in same cases. Standard & Poors upgraded Russia’s long-term foreign and local currency credit rating to a more stable outlook. Russia has exhibited an excellent ability to service debt.

Many factors enter into play explaining Russia’s recovery. Some of them are highlighted below. The combination of these factors suggests, in my assessment, that you can count on the long-term sustainability of Russia’s current growth curve.

1. Russia has the right leadership and the right vision. President Putin has demonstrated an effective leadership style, and that he is firmly in control. Political stability has been demonstrated, especially in contrast to the instability defining the Yeltsin period. There is no specter of the disintegration of the Russian Federation or abrupt changes in government, nor is there the earlier worry of a “return to communism.” Putin has consistently been able to maintain a good working relationship with the Duma and Federation Council.

2. Russia undertook a series of economic policies that pointed its direction towards success, which some call “Putinomics.” These included a low exchange rate, a moratorium on new foreign borrowing, and a strengthening of the federal government. Russia has used its hard currency surpluses to pay down debt, and has restored its reputation for creditworthiness.

3. Russia learned from painful mistakes of the past. Russians developed a unique psychology of independence following the 1998 crisis. They had no choice but to go it alone, and they did. Because, for example, they could no longer finance consumer imports, they beefed up domestic production and the quality of domestic goods, and now Russians in many cases prefer “home grown” to imports.

4. A major overhaul of the tax code has brought tax and accounting norms closer to Western standards. These include a flat rate for individuals and a reduced rate for companies. Further, the corporate governance crisis and accounting scandals in the U.S. have given some Russians a modicum of satisfaction. While Russians are beefing up standards, many U.S. companies are under fire and experiencing their own accountability crisis.

5. Russia made the right foreign policy choices in the aftermath of September 11. They are now part of the international coalition against terrorism. Putin’s ability to engage in alliance building at this crucial time in history has paid off well, and brings Russia into a formidable group of Western countries with a common goal and a common enemy.

6. Russia has the right natural resources that the world will increasing come to rely on, mainly oil and gas. A primary reason driving the Bush-Putin friendship is that both men realize they have something the other needs. As tensions mount in the Middle East, there is no question that Russia will become an increasingly important strategic oil partner and supplier.

These are only a few factors that have combined to put Russia on the path to a successful recovery. One of the most important contributors is the Russian people themselves. They have exhibited stamina, determination and drive to overcome adverse circumstances and realize their full potential.

Naturally, there are still problem that need to be addressed in the Russian Federation. These include the disparity and unevenness of development between Moscow and the regions, and the successful resolution of key investor disputes. The latter mount by the day, and they scare away investors, and require serious attention by Putin’s government.

There are also threats to recovery. These would include a falling out with the West over political issues, such as a war with Iraq or policy towards Iran. Another threat would be a major war on Russian territory. Russia learned last century how devastating a consequence and inhibitor to growth are cumulative wars on its territory. This century, it hopes to avoid war at all costs.

Without question, you can expect Russian growth to continue in an upward trajectory, and to increase in even more rapid increments as time goes on. The engine of growth is in motion, and there is little to stop it now.