What Is Driving Recovery?

A stroll along Tverskaya Ulitsa with its dozens of construction projects, banks and glitzy shop windows should be enough to convince any doubter that rapid growth is taking place in the Russian economy.


But take the metro across town to the troubled ZiL plant, or hop on a plane to a Urals city like Chelyabinsk, and you will see industry at a standstill.


While many of Russia's old industries are dying, new vibrant private businesses are rising from the ashes to take their place.


"The recovery is starting from infrastructure -- telecommunications, banking, financial services, construction, hotels," said Pavel Teplukhin, an analyst with the independent Center for Economic Performance, in an interview Friday. "Industrial production is not growing, but at least it has stopped falling."


Whether or not Russia's recovery will be an extended one, however, depends largely on whether it can create attractive conditions for investors, economists say.


While gross domestic product has collapsed since the demise of communism in 1991, the economy has been transformed beyond recognition. The private sector, which did not exist 10 years ago, now accounts for some 50 percent of GDP, according to the state statistics committee, also known as Goskomstat.


The committee, set up to monitor a planned economy, itself concedes it may be doing a poor job in recording the activity of the new private sector and estimates that as much as 20 percent of economic activity slips through its statistical net. Independent analysts say the real proportion is likely to be even higher.


One indicator that the economy is picking up, however, is that both real per capita incomes and retail sales in December reached their highest levels since 1991 while decline in industrial output slowed.


An Economics Ministry report cited Thursday by Itar-Tass shows a 4.5 percent decline in industrial output in the first quarter of 1995, compared with the same period last year. This represents a considerable slowdown in the rate of industrial decline: the equivalent fall a year earlier was 27 percent.


The change, however, does not mean that Russia's old industries are about to bounce back, says Teplukhin. It is simply that many of them cannot decline further without ceasing to exist completely, consequences which are currently unacceptable.


"Everyone knows the coal industry, for example, must die," he said. "But you cannot simply close down entire industries because the exit costs are too great, so the government will sustain them [industries] at a certain level."


The Economics Ministry report says industry's decline is now almost entirely due to the tight monetary policy adopted by the government since last fall in a bid to stabilize the economy and create better conditions for investment.


According to Goskomstat, M2 money supply, which records currency in circulation plus bank deposits, did not grow at all in January and February 1995, compared with growth of 14 percent in the second quarter and 5 percent in the third quarter of last year.


Tight financial policy is crucial if the economy is to stabilize this year and begin to attract investment -- both Russian and foreign -- that will fuel sustained growth, analysts say. But, according to Goskomstat, capital investment fell by 26 percent in 1994, far in excess of the 15 percent decline in GDP.


"You can't expect a rise in investment until you have lower rates of inflation and a stable exchange rate," said Teplukhin. "Investors need a stable environment in which they can plan their cash flows for the next few years."


There are signs this is starting to happen. The rate of monthly inflation fell from 18 percent in January to just 11 percent last month, according to statistics committee figures. Sergei Pavlenko, head of the government's Working Center for Economic Reform, told reporters earlier this week that monthly inflation for March would likely come in at around 8 percent.


Some say, however, that the strict measures the government is implementing could be storing up problems for the future.


"Be under no illusions, short-term macroeconomic hoop-jumping is achieved by storing up huge political problems," said one Western economist, who declined to be identified. "It's not enough just to cut spending, it doesn't solve any fundamental problems."


"Sooner or later the government is going to have to address big political problems, like oil, gas and managerial restructuring. It is going to have to pay wage arrears."