Apathy Economy Shows

The Russian share boom of 1997 has thrilled investors, brokers and a few executives in Russian blue chip companies. But for a large part of the economy, a booming stock market remains irrelevant.

The problem, say analysts, lies in the huge industrial base that Russia carried with it six years ago on its journey from communism to capitalism -- an industrial base that largely has yet to progress to the stock market.

"What you have here is a load of big firms left over from the Soviet Union which are moving forward at different speeds and some not at all," said Richard Stoneman, adviser at the Russian European Center for Economic Policy, or RECEP. "The boom in the stock market is of marginal relevance to them if they are in a sector that isn't represented in the market index."

The electronic RTS system, Russia's main share trading floor, now comprises more than 100 companies, and share appreciation has spread to a few unquoted companies in the "darling" sectors of oil and gas, power generating and telecommunications.

But tens of thousands of Russian companies, each with work forces in the thousands, are still out in the cold, Stoneman said. The industrial baggage renders stock indexes in Russia meaningless from a macroeconomic standpoint, a point in contrast with an index in an agricultural-based emerging market.

"In other emerging markets, the companies that show up on the market index often add up to a significant part of the economy, but not in Russia," said Stoneman.

The current bull market is equally meaningless for small firms, which form the backbone of developed economies but are struggling to emerge in Russia.

"In the West, economic growth is not driven by companies on the New York Stock Exchange or any other big exchange, but by small, start-up companies," said Kenneth Payne, senior analyst with brokerage Regent European Securities. "The real question for the Russian economy is what will happen with start-up companies."

Simon Johnson, another RECEP adviser, said Friday that the small business sector in Russia was still very weak compared with other post-communist countries. Johnson said small businesses prefer to stay in the unofficial economy, not because they fear taxation, but because they see no benefits in becoming official.

"If they register their business there is no advantage to them, no legal protection, particularly from local government," said Johnson.

The stock boom also means little to Russians on the street. Although mutual funds were developed to attract investment from average Russians, the population lacks the instinct to invest. Also, mutual funds are in their infancy, with only one fund licensed for equity investment, Johnson said.