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. Last Updated: 07/27/2016

Soaring Economy a Pleasant Surprise

2000 looks set to go down in history as the year that the economy finally turned the corner and picked up steam thanks to market reforms.

For the second year in a row, industries pumped more crude and cast more steel while the government collected fatter taxes.

"It was such a soft landing after the crisis that some people forget we were on the brink two years ago," Central Bank deputy head Tatyana Paramonova marveled after a discussion in the State Duma this week.

The economy, fueled by the petro-boom and lingering effects of the 1998 ruble devaluation, is zooming ahead at a pace of 7 percent a year. The currency has remained steady at 27 to 28 rubles to the U.S. dollar, defying even the federal budgets forecast that it would drop to 32.

Inflation, whose spurt over the summer momentarily sparked panic in government circles, has ultimately been held in check at about 20 percent.

Tellingly, these same economic factors were in place in the middle of the 1990s when the economy contracted for six years in a row.

But the difference this year, market watchers said, is that the governments excruciating attempts to reform the market are now moving forward and bearing fruit.

"There was an incredible amount of chaos in the 1990s, but a lot of constructive change resulted from this," said Renaissance Capital president Stephen Jennings.

President Vladimir Putins government rolled up it sleeves and drew up a broad economic action plan. It pushed through a major overhaul of taxes, a feat that alluded former President Boris Yeltsins team for years.

The government also managed to rack up 300 billion rubles ($10.8 billion) more in revenues than anticipated in the budget and it took strides toward restructuring national monopolies like power giant Unified Energy Systems and gas company Gazprom.

"Im not saying what weve got here is a bed of roses," Jennings said. "But it was better than what 99 percent of people expected a year ago."

There were some critics of the governments economic plans, the most skeptical of whom was no doubt the presidents economic adviser, Andrei Illarionov.

Illarionov charges that the government has committed several major blunders this year by bloating its expenditures and taking a wrong path in its talks with the Paris Club.

The government boosted expenditures by 28 percent as the economy grew 7.3 percent over the first nine months of the year, leaving little room for it to maneuver in the future, Illarionov said.

At the same time, the government let the ruble appreciate 10 percent against the dollar in the consumer sector and more than 20 percent in the manufacturing sector, thus undermining its competitiveness on international markets, he said.

"If we pursue the same sort of [macroeconomic] policy over the next 10 to 12 months, we will have the same price levels as in July 1998," Illarionov told Ekho Moskvy radio this month, referring to the overvalued ruble the month before the financial crisis hit.

He predicted that the economy will inevitably slowdown due to loss of competitiveness next year.

But so far, companies have been performing better than at any time since the mid-1960s.

Russian firms embarked on acquisition sprees and snapped up industrial assets from foreign owners, reversing a trend that prevailed throughout the 1990s.

Consolidation became a byword in several sectors of the economy, including metals, oil, gas, pulp and paper.

Investments and consumer demand kept growing at an accelerated pace.

"The recovery has become more broad based, as both consumer demand and investment growth have picked up significantly," Deutsche Bank said in its World Outlook report for 2001.

The marker players who did not feel the effects of this years economic recovery were the brokers.

"The main disappointment this year is that the Russian market has proved to be a hostage to the Nasdaq," said Eric Kraus, chief strategist with NIKoil.

The RTS index was climbing steadily until it hit a high of 243.9 at the end of March, inspiring a tangle of optimistic forecasts that for the most part envisioned the stock market ending the year at 250 to 300.

But for the third time in the past four years, Russian brokers may well get low marks from their clients.

The RTS index tried to storm above the 240 level several times throughout the year, with the last attempt coming on Aug. 29 when it hit 245.49.

But then stocks hiccuped and went into a spin as the high-tech stocks driving U.S. markets took a beating.

The RTS closed Dec. 22 with a cumulative loss of 24 percent since year-start.

"Its the same as in 1997 the markets diverged from the real economy," Kraus said.

"But that divergence cannot last forever," he said. "In the past, weve seen a lot of promise, but little reality. Reformers were abandoned by political power. Now its different."

The investment community is now looking to Putin to see what his economic agenda will be in 2001.

Several items that top the governments agenda are reform of the judicial system, the banking sector and natural monopolies.

A major effort will also be needed to revamp the countrys infrastructure, which continues to suffer from a combination of Soviet thinking and contemporary policies, said Jennings at Renaissance Capital.

"There are things that the new administration is capable of doing in the next 12 to 18 months and things that it is not capable of doing," said Renaissance Capitals Jennings.

The government will in all likelihood be able to carry out its plans to cut taxes, reduce red tape and streamline its own operations, but it is unlikely to create any new institutional frameworks in the short run, Jennings said.

But the good news for investors is that there is an apparently reform-minded pilot behind the wheel.

"I continue to have a very positive view on Putins management of the economic reform process," Kraus said.

Goldman Sachs predicted last year in a report: "Russias second attempt at capitalism is only just beginning."

Investors at the end of 2000 are now saying that this second attempt will without a doubt be much closer to reality than the previous one started a decade ago.