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. Last Updated: 07/27/2016

AUG. 17 REVISITED:Economic Boomlet Based on Oil, Ruble

Having bought himself a car and then a mini-van over the past few months, the outdoorsy, middle-aged professor decided it was time this summer to build that country house he'd always wanted.

Another baby boomer living the American dream? No, Sergei lectures at a Moscow engineering institute.

But like many other Russians this year, he is finding that 1999 is not the barren wasteland he might have expected.

"You can build a wooden house for $5,000, plus materials," Sergei said on a recent sunny July evening. Sergei, like many Russians, is a bit mysterious about where his money comes from, but his salary can't be more than $100 a month.

He is not alone in finding that the crisis has made some things more affordable. Construction of private houses has boomed this summer, as low labor costs and rock-bottom prices for materials unleashed pent-up demand.

As for the car - a Volga - "It cannot get cheaper than it already is," was how he reasoned before blowing $5,000 on the purchase.

Of course, the crisis initially devastated Russian's aggregate purchasing power, which has only just begun to recover.

However, it also provided a powerful stimulus in the form of the devaluation. The weaker ruble has boosted the competitiveness of domestic goods, leading to a surge in output.

"It is encouraging to see that the Russian economy has responded to the devaluation as a normal economy, that market forces prevail and a certain degree of flexibility exists," the Russian-European Center for Economic Policies said in a May newsletter.

By July, industrial production was up 11 percent on a yearly basis, according to state statistics.

At the end of last year, foreign bankers made angry and skeptical by their own shellacking were predicting 100 percent inflation for Russia and a slump in the national currency from the year end rate of about 21 rubles to the U.S. dollar to 40 rubles and lower.

The government forecast a 3 percent drop in gross domestic product, and key lender, the International Monetary Fund, anticipated a 8.3 percent contraction of the economy.

And February looked even gloomier than January, as global oil prices plunged to below $10 a barrel. Expectations for Russia - which heavily relies on revenues from oil exports to feed the federal budget - hit rock bottom.

But as it turned out, so had oil prices. When they began rebounding after the Organization of Petroleum Exporting Countries agreed to cut exports in March, so did Russia.

With prices now standing at well over $20 a barrel, Russia is reaping the benefits of its oil dependency.

"Higher oil prices boosted fiscal revenues, taking pressure off the ruble and improving the government's fiscal performance," says Grigory Vygon, senior researcher with Institute of Financial Research (Moscow).

Steven Dashevsky, an oil and gas analyst with Aton, estimates that higher oil prices will bring in an extra $1.5 billion to the budget in 1999 - which projected yearly revenues of just under $20 billion, with a forecast of $13 per barrel.

Oil prices are expected to stay buoyant until at least next March, when the OPEC agreement ends, so the good times for Russia are here until then.

Former doomsayers have been forced to backpedal, and expectations have been raised that Russia will enter the year 2000 not much worse off for the wear.

The IMF now forecasts a 2 percent contraction of the economy and the government expects it to remain flat on a yearly basis.

Inflation is unlikely to top 50 percent for 1999 and consensus forecast for the exchange rate puts it at 28 rubles per dollar by the year's end.

Most economists agree, though, that the current economic stabilization is not likely to last because the nation is being propped up mainly by the ruble devaluation and strong oil prices. Russia is not likely to turn the economic corner for years to come, they say.

"Growth unfolded on very weak fundamentals, namely devaluation and rising oil prices," says Peter Westin, an economist at the Russian-European Center for Economic Policy.

Also, old corporate cultures, the criminalization of society and corruption do not disappear overnight.

"It might take a generation before we get a really positive outlook for Russia," says Vladimir Konovalov, economist with CS First Boston.

"Russia can solve its problems in the course of three to four years or it can remained bogged in the mire for decades," said former Central Bank chairman Sergei Dubinin.

Government estimates show that foreign direct investments will decline this year to a miniscule $2.2 billion from $3.5 billion in 1998. They peaked at $6.2 billion in 1997 and have steadily declined since then.

In addition, recent economic successes are unlikely to last long unless domestic demand picks up and structural issues are addressed.

"A boost in exports would sooner or later clash with limits slapped on imports, like steel exports to the United States," says Dubinin.

Spurred by complaints of steel dumping by U.S. producers, Washington earlier this year imposed strict quotas on Russian steel. Domestic demand is unlikely to see an actual jump since living standards have plunged, with real per capita income down a quarter from last year. By mid-1999, 72 percent of Russians were claiming cash incomes of less than 1,000 rubles ($40) a month.

The government, saddled with debts, is unable to compensate for falling private consumption by spending more money.

And then there is the disastrously uncertain political situation, as was so dramatically underlined by President Boris Yeltsin's decision to sack his prime minister for the fourth time in 17 months and the second time in three months.

With State Duma elections due in December and presidential polls slated for June 2000, few firms are brave enough to make investment decisions now, said Yevgeny Gavrilenkov, deputy director of Bureau of Economic Analysis.

However, this year's surprisingly good economic performance has raised hopes that the foundations for a free market are now strong enough to survive the end of the Yeltsin era.

"The country will become more stable and predictable no matter who takes the helm at the next elections," Gavrilenkov says.

The next president will have no choice but to act on issues like property rights, taxation and corporate restructuring, economists said.

"The new president, be it [Moscow Mayor Yury] Luzhkov, Primakov or one of the [other] ex-prime ministers, will simply be forced to tackle these problems by the sequence of events, even if this goes against his personal will," said Andrei Neshchadin, head of the Expert Institute.