Russia's economy purring three years after resounding crash

The Russian economy is not just ticking over but actually humming three years after the resounding August 17 financial crash that many feared could spell the end of liberal post-Soviet reforms.

Once-bitten Western investors are once again sizing up the benefits of buying into Russia's muscular local bond and stock markets. Encouraging prices on oil exports have piled Russian hard-currency reserves to a record high.

And even the World Bank chief has made reassuring noises to the effect that Russia is immune to the emerging market jitters now hitting Argentina and Turkey.

"I think that with the reserves and the growth that you have and high commodity prices on things like oil, you are in better shape than you were just a few years ago," World Bank President James Wolfensohn said on a recent visit.

"Russia is performing like few could have imagined three years ago," market watcher Sylvie Armand-Delile noted, pointing happily to 36 percent stock index growth this year.

"Russia is now one of the best performing markets in the world," she said in reference to an index that lost 90 percent of its value in a matter of weeks exactly three years ago on Friday.

But many admit that the time for blissful optimism may be short. Russia's inflation is growing far faster than expected and the benefits for local enterprises brought about by the massive 1998 devaluation are winding down.

Analysts say that 2001 inflation will exceed 20 percent and even raise the prospect of the dreaded so-called "Dutch disease" -- a government's over-reliance on exports with disregard to structural reforms, eventually being engulfed by unchecked inflation.

"The opportunity that devaluation gave Russia in 1998 has largely been lost," remarked Mikhail Delyagin, an economic advisor to former president Boris Yeltsin.

"The last devaluation made Russian business work. The next one -- which will inevitably come -- must make the Russian government work too. The regional business barons are starting to strangle the economy."

Indeed Russia has recently agreed a change to its monetary policy that would allow a more free-flowing exchange rate at the expense of its hard currency reserves.

The idea is to ease inflationary pressures while avoiding the painful ruble plunge that saw tens of thousands of people's life savings wiped out overnight in 1998.

Three years on, Russia's banking sector remains a shambles. One analyst said there were 1,316 "bank-like" institutions in Russia today -- almost the same number as in August 1998 -- although few of them have any holdings other than debts and a license.

"The bankruptcy process is not working," said Andrei Ivanov of the Troika Dialog bank. "Some 38 percent of all accounts are controlled by state banks. In that sense, little has changed since 1998."

But some say that criticism is too harsh.

Russian President Vladimir Putin has won praise for ramming through wide-ranging tax system reforms that slash rates and make them uniform and thus easier to collect.

The government is now mulling the best way to do away with an ineffective Soviet-era tariffs system without hurting the population.

And -- in large part thanks to oil and natural proceeds -- pensions and other benefits are finally being paid on time.

"The fact that people are getting paid, that pensions are being paid, that companies are paying their taxes in cash instead of barter -- all this means that there is now a belief in Russia," said Peter Westin of Aton Capital bank.

Meanwhile Putin's reformist economic advisors -- while often squabbling among themselves -- are promising that they understand that the economy cannot survive on oil alone and are going to push ahead with a top-down economy overhaul.

"We forecast that by 2004 Russia will have completely overcome the consequences of the 1998 crisis," vowed Deputy Prime Minister Alexei Kudrin.

"The government is completely ready for the scenario in which oil prices fall."