Europe South Asia Asia Pacific Americas Middle East Africa BBC Homepage World Service Education



Front Page

World

UK

UK Politics

Business

Sci/Tech

Health

Education

Sport

Entertainment

Talking Point

In Depth

On Air

Archive
Feedback
Low Graphics
Help

Monday, August 16, 1999 Published at 17:31 GMT 18:31 UK


Business: The Economy

From Russia with love

Russia's economic crisis is hitting the weakest hard

Twelve months ago, on 17 August 1998, Russia's economy played out a worst-case scenario.

The rouble collapsed, the country's fledgling stock market crashed and the government and many banks defaulted on their debts.

Russia appeared to be set for hyperinflation, social unrest and a possible return to autocratic rule.

But the dire predictions have not come true. In fact, the brutal devaluation of the rouble appears to have done the country's industry a lot of good. One analyst says: "It was a shot in the arm".

Triple boost

The rouble's collapse - from 17 to just 4 US cents per rouble - has made Western imports prohibitively expensive, leaving the market open for Russian manufacturers.


[ image: Russians who had their savings in roubles saw them wiped out]
Russians who had their savings in roubles saw them wiped out
Exporters, meanwhile, are now competing on price and aggressively moving into foreign markets. Russia's trade surplus jumped to $6.2bn in the first quarter of 1999, up from a meagre $0.2bn a year earlier.

These two factors, and a revival of consumer demand, have set up the economy for a small boom.

Peter Westin, an economist with the Russian-European Centre for Economic Policy, says that "one year after the crisis, it's far better than we predicted".

He is not alone. Most analysts had forecast that Russia's economy would shrink during 1999.

Now the predictions range from a growth rate of 3% to 8%. Even at the lower level this would be more than at any time since economic reforms began in 1992.

The rise in oil prices has helped as well, boosting the government's tax revenue.

And despite the devaluation, inflation is running low.

The initial shock made prices jump by more than 38% in September last year. Now they are under control again, rising month-on-month - by 1.9% in June and 2.8% in July.

All this makes for optimistic reading, and investment bank Goldman Sachs recently found a fitting title for a study of the country's economy: "From Russia with Love".

Once bitten, twice shy

Western investors, though, are holding back. When the rouble collapsed, they were skinned.

  • Multi-billion-dollar investments in Russian companies suddenly became virtually worthless and brought minuscule returns.
  • Loans to Russian banks or the government were not paid back.
  • The value of investments on the share market evaporated.

    Now they are reluctant to throw good money after bad.


    [ image: The Moscow stock exchange is still in the doldrums]
    The Moscow stock exchange is still in the doldrums
    Philip Poole, emerging markets strategist with ING Barings in London says that "investors have learned that you don't get returns from high-yield instruments without taking on substantial risks".

    During the 1990s, many investors had hoped to make a quick buck, lending lots of money in short-term credit at high interest rates, regardless of risk.

    Now they have made a 180-degree turn and avoid all risk.

    The same holds true for shares. Around the world stock markets have posted strong gains during 1999. But Moscow experienced only a brief spring rally, and the total market value is less than a quarter of its level in January 1998.

    As a result, the once-mighty stream of foreign investment in Russia has been reduced to a trickle.

    Western investors hardly bat an eyelid during last week's political crisis in Moscow. Russia is simply not relevant, because nobody invests there anymore.

    Bailing out Russia

    The Russian government still gets some money from the West. The International Monetary Fund has now resumed some of its loan payments.

    Politically, the nuclear power Russia is too important to be completely left in the cold.

    But it is unlikely that new loans will be announced before some radical economic reforms are in place.

    Reform logjam

    Russia's legal system is anarchic. The tax code is byzantine, and revenue collection a mess - even though it has been improving lately.


    [ image: Many of Russia's pensioners try to make a living by trading on markets]
    Many of Russia's pensioners try to make a living by trading on markets
    Investors, meanwhile, have to cope with red tape, a chaotic banking system, and contend with the overtures by the Russian Mafia.

    The Moscow government has promised repeatedly to deal with these issues, but experts say it is unlikely that reforms will be forthcoming.

    In December, Russia votes for a new parliament, and in 2000 the country will elect a new president.

    As these elections loom, the danger is that political stability will be bought by delaying reforms and taking action which will result in economic instability.

    Sergei Kiriyenko, who was prime minister at the time of the rouble devaluation, says the government has wasted the past year.

    "We have spent it not on structural reform, but on creating an illusion of a fragile political stability," he says.

    Moscow-based MFK Renaissance brokerage warns that the "current flickers" of economic recovery will be snuffed out if the country fails to "restructure its industry and underpin price competitiveness with more fundamental improvements".

    Investors have noted that, and kept their purse strings tight.

    But without Western investment, the good economic news from Russia may soon be drowned out by the familiar sound of crashing financial markets.



    Advanced options | Search tips




    Back to top | BBC News Home | BBC Homepage | ©


  • The Economy Contents


    Relevant Stories

    10 Aug 99 | The Economy
    Russian market bounces back

    28 Jul 99 | The Economy
    IMF loan clears way for Russian debt talks

    25 Jun 99 | The Economy
    Russian laws-for-loans approved

    19 Jun 99 | The Economy
    G8 talks focus on ailing Russia

    12 May 99 | The Economy
    Economic trouble as Primakov goes

    15 Apr 99 | The Economy
    World Bank agrees Russia loan

    17 Aug 98 | The Economy
    Russia - an economy on the brink

    19 Aug 98 | The Economy
    When No means Yes

    17 Aug 98 | The Economy
    Russian rouble devalued

    14 Aug 98 | The Economy
    G7 words calm Russia's markets

    13 Aug 98 | The Economy
    Russia faces meltdown





    In this section

    Inquiry into energy provider loyalty

    Brown considers IMF job

    Chinese imports boost US trade gap

    No longer Liffe as we know it

    The growing threat of internet fraud

    House passes US budget

    Online share dealing triples

    Rate fears as sales soar

    Brown's bulging war-chest

    Oil reaches nine-year high

    UK unemployment falls again

    Trade talks deadlocked

    US inflation still subdued

    Insolvent firms to get breathing space

    Bank considered bigger rate rise

    UK pay rising 'too fast'

    Utilities face tough regulation

    CBI's new chief named

    US stocks hit highs after rate rise

    US Fed raises rates

    UK inflation creeps up

    Row over the national shopping basket

    Military airspace to be cut

    TUC warns against following US

    World growth accelerates

    Union merger put in doubt

    Japan's tentative economic recovery

    EU fraud costs millions

    CBI choice 'could wreck industrial relations'

    WTO hails China deal

    US business eyes Chinese market

    Red tape task force

    Websites and widgets

    Guru predicts web surge

    Malaysia's economy: The Sinatra Principle

    Shell secures Iranian oil deal

    Irish boom draws the Welsh

    China deal to boost economy

    US dream scenario continues

    Japan's billion dollar spending spree