Putin sells foreign investors on Russian economic rebound

There's good and bad news about the struggling Russian economy's rebound from the financial crash of 1998. A group of 300 top-drawer global investors meeting at the World Economic Forum in Moscow today are going to hear both, and be invited to put their money on a choice.

The glad tidings will be delivered by Russian President Vladimir Putin, who is expected to open the two-day round table, organized by the Davos Forum, by announcing that Russia has overcome its historic crisis and is set to become one of the world's fastest developing societies.

"This meeting is tremendously important for Putin," says Andrei Ryabov. "He needs to convince world business leaders that the Kremlin has moved beyond declarations of reform to enact real changes that draw Russia closer to the world economy."

Mr. Putin will be able to say that Russia's economy is on track to grow more than 5 percent this year, despite a global slowdown. Most key indicators, including real income, investment, manufacturing, and consumer spending are bubbling upward.

"Putin will point to healthy productive forces emerging in our economy after a decade of stagnation and disorder," says Viktor Semyonov, a centrist member of the State Duma's Committee on Economic Development. "We are now entering the period of real structural reforms."

However, a few Cassandras will be stalking the hall. "Much of what Putin says will be true," says Mikhail Delyagin, director of the independent Institute for Global Forecasting here, who is slated to speak at the meeting. "But Russia's basic problems are not being adequately addressed, and our growth is going to stall. If there is no change in direction, Russia is headed for a new crisis within a couple of years."

The World Bank issued a report last month, warning that Russia's economic recovery is too narrowly based on windfall profits from high global oil prices, capital flight is still at catastrophic levels, and investment remains far below the amounts needed just to sustain existing capacities.

Despite some key reforms promoted by the Kremlin, no strategy is discernible. "The lack of clear reform priorities threatens to derail the government program," the report by the Center for Economic and Financial Research warns bluntly. "The growth challenge for Russia is daunting."

Fixed capital investment in Russia this year will be $40 billion, up 8 percent from last year, but far below the $70 billion needed for the economy to tread water. Direct foreign investment will stagnate at $5 billion this year, the report says.

Three years ago, Russia's economy virtually imploded after the government defaulted on many debts, the ruble lost two-thirds of its value, and the banking system collapsed.

But Russia has surprised most observers by clawing back most of those losses. Last year, its economy grew by more than 8 percent, while the foreign trade surplus roared to almost $40 billion. This year's projections are lower, but still impressive. More importantly, retail trade for the first nine months was up more than 10 percent over last year, while real income for Russians grew 6 percent. According to the State Statistics Committee, the number of Russians living below the official poverty line of about $50 a month has fallen from one-third to about 25 percent over the past two years.

Over the same period, Mr. Putin has used his enduring popularity and practical control of the Duma to push through key laws that begin to create a predictable legal environment. A flat income tax of 13 percent for all was introduced last year, while corporate taxes were streamlined and reduced to a maximum of 24 percent. A new land code, signed into law by Putin last week, will enable Russians - and foreigners - to freely buy and sell some land for the first time in Russian history.

"No one can deny that things are a lot better," says Mr. Semyonov. "More Russians are living better, and allowing themselves more hopes than has ever been possible. The changes are not just on the surface, but deep and fundamental."

But economists warn that much of this progress has been possible because of soaring global prices for oil and raw materials - the bulk of Russia's exports. As the world economy heads into rougher waters, those prices are plunging. Economists calculate that $1 fall in the price of a barrel of oil will deprive the Russian government of $1 billion in revenue.

And the bounce that Russia's industries received from the ruble devaluation has worn off. Imports are sharply up, squeezing Russian goods off the shelves.

Though potential investors may be heartened by the legal changes, the Berlin-based Transparency International still rates Russia one of the most corrupt places on earth.

"There is still too little protection for property rights," says Mr. Delyagin. "Most Russian regions remain economically depressed, and the majority of Russians are still sunk in poverty." Moreover, Delyagin says, small and medium businesses still account for less than 12 percent of Russia's GDP. "Russia remains an economy dominated by a few huge corporations."