Crucial times for Russia's economy

Many investors don't know what Mr Putin stands for

By BBC News Online's Orla Ryan

Russia's newly-appointed President Vladimir Putin has provided few concrete details about his economic policies.

But many observers say that now is a crucial time for the Russian economy, when further reform is needed to cement the fragile recovery.

Late last year Mr Putin boasted that his country's ailing economy is now "bursting with new life".

Many Russians still live in poverty

"For the first time since the start of reforms, we have sustained growth over a span of 14 months," Mr Putin told parliament in a speech on the state of Russia's economy late last year.

"This is the result of the sharp devaluation of the rouble ... and the high oil prices that, thank God, continue to rise."

Since then, oil has continued to rise in value, reaching $34 a barrel in New York in March, a tripling of the price in one year.

Oil is crucial to the Russian economy. It is the biggest export, and tax revenues from oil and gas companies are vital in curbing the budget deficit.

Since the currency crash in August 1998, Russia has weathered a debt crisis and the cost of financing the war in Chechnya.

While many expected the country to dissolve into crisis following the rouble devaluation, it had some surprising effects.

It gave a much needed boost to local manufacturers as imports became too expensive for the Russians.

"What we have had since devaluation in August 1998, is quite a strong economic performance," chief economist at ING Barings Philip Poole said.

The fact that Russia has survived thus far without resorting to printing money to pay its wages and arrears has won it plaudits from, among others, the International Monetary Fund.

IMF weighs its options

The improvement has been such that Russia has, unusually, beaten the targets set in a loan agreement with the IMF.

The IMF has still to decide whether to resume lending

But it has still to implement other specific changes the IMF wants in areas such as bankruptcy law, and better financial monitoring of social security funds.

The IMF is also concerned about allegations that some of its money may have been in effect stolen, although it insists that it has found no evidence of that.

The Fund's concern reflects broader concern that widespread corruption in Russia will prevent the development of a market economy.

Up to now, the Russian economy has been dominated by a small group of oligarchs, many of them closely linked to the Yeltsin regime, who benefited from privatisation of the economy.

Mr Putin's attitudes to these groups is still unclear.

Russian resilience

The Russian economy has proved surprisingly resilient this year.

The Paris-based Organisation for Economic Cooperation and Development estimates that the Russian economy grew 3% in 1999, after shrinking 5% in 1998.

Inflation slowed to 37% in 1999 after hitting 84% the previous year, the OECD estimated.

But on balance it says overall economic performance has been disappointing.

"The future growth and prosperity of the Russian economy depends, first and foremost, on the ability of the government to jump start the process of structural reform in this difficult context," the OECD said.

Russia still needs to sort out local government finances and devolve fiscal responsibility to the regions.

It still has to reform tax laws - in a bid to increase tax revenues - and force through bankruptcy of companies and in some cases regions.

Too many people rely on the black economy, with non-cash barter accounting for nearly 40% of industrial trade.

But nevertheless, Russia does collect 33% of GDP in tax revenues - as much as in the United States and an impressive figure for a transitional economy.

What does Putin stand for?

The trouble for investors is that thus far it is not clear what Mr Putin stands for and how committed he is to pushing these measures through.

"Putin has been deliberately vague and general," ING Barings chief economist Philip Poole said.

"His whole focus has been on getting himself elected. He has not wanted to alienate any part of society ... I think at this stage it is very difficult to be clear as to what he stands for," he added.

While investors are betting that the economy will continue to improve, many investors that were stung by the rouble devaluation have been reluctant to step back in.

Even if legislation is pushed through parliament, the test of strength for the president will be making sure it is implemented.

"That has been a major problem for Russia in the past. He has to make sure central policy is implemented in the way it is intended to be," Mr Poole added.