The Volga Basin's Merchant Capital Is New Russia's Economic Showcase

Industrial production is falling all over Russia. Not in Nizhny Novgorod, where political stability and progressive leaders are making reform work.

COMMANDING the heights above the confluence of the Volga and Oka rivers, the kremlin of Nizhny Novgorod has protected this traditional merchant center since the 14th century.

Even today, though the threat of invasion has long ago passed, the ancient fortress still plays a significant role in the economic life of 20th-century Russia's third largest city.

As Russia grapples with free market reforms, those working within the red-brick bastion remain the main protectors of the local merchant class, which is reemerging after 70-plus years of Communist suppression. But in contrast to previous centuries, when the city's defenders manned the ramparts, these days they fill the offices of the Regional Administration building, located on the kremlin grounds.

Here reform's most important champion is Boris Nemtsov, the region's 34-year-old governor. Under his leadership, Nizhny Novgorod has become Russia's free market showcase, moving faster and farther than any other Russian area to privatize state-owned enterprises and unleash entrepreneurial potential.

Yet despite their accomplishments, Mr. Nemtsov and his team freely admit there is still plenty of work ahead. ``The more we accomplish the more we realize must be done,'' says Viktor Lisov, a top aide to Nemtsov.

Of all the reasons for Nizhny's economic success, the progressive thinking of the regional leadership is most important. In Russia, reform still greatly depends on personalities, and in many regions political leaders have only grudgingly taken steps to dismantle the command system installed by the Communist Party during its seven decades of unchallenged rule. That system concentrated virtually all power over the economy in the hands of the political elite.

In Nizhny, however, the Nemtsov administration views government bureaucracy as market reform's biggest stumbling block and has tried to redistribute economic decisionmaking power. ``The leadership here understood that it had to give people economic freedom to make reforms work,'' Mr. Lisov says.

Reforms in Nizhny have greatly benefited from harmonious relations between the legislative and executive branches of the regional government. In Moscow, by contrast, the conflict between President Boris Yeltsin and parliament has emerged as reform's largest obstacle.

In addition, the city's status as the Volga Basin's traditional merchant capital has helped promote reform. Before the Bolsheviks came to power in 1917, the annual Nizhny Novgorod fair was one of the largest trade exhibitions in Russia, attracting merchants from across the empire. The merchant heritage goes along with an industrial tradition dating to the 19th century and strengthened during the Soviet era. Now Nizhny has a population of about 2 million and a large concentration of military-industrial plants.

Tradition, liberal leadership, and stability all have helped make Nizhny a reform laboratory, attracting lots of outside attention. Leading Russian economist Grigory Yavlinsky, for example, has worked with local leaders to develop a blueprint for further reform. Nizhny also has received significant federal aid, as well as advice from foreign organizations, particularly the International Finance Corp., a World Bank affiliate.

``If there were 10 Nemtsovs around that had his drive, then [Russia] would be in a much better position,'' says Charles Froese, a retired American oil executive who advises local industrial managers on the free market transition.

The region has garnered the most attention for its privatization plans, being among the first to sell off small and large-scale enterprises, as well as agricultural land. But Nemtsov and others are perhaps more proud of Mr. Yavlinsky's overall reform plan.

That program aims to encourage entrepreneurial activity by reducing bureaucratic procedures and maintaining a stable social climate. The Yavlinsky economic team also has employed innovations to help local government deal with social obligations, including the issue of post-communist Russia's first municipal bond. Last year's bond issue raised about 3 billion rubles ($3 million) for city coffers.

Beyond the Yavlinsky plan, the Nizhny region has pioneered Russia's new bankruptcy process. In late August, the Zvezda knife factory near Nizhny became the first major industrial enterprise to file for bankruptcy. Zvezda lists debts of over 90 million rubles (about $90,000), and is hoping a court-appointed receiver will turn the company around. If Zvezda is successful, it could provide an important precedent. Though Russia has had bankruptcy legislation since March, Soviet-era factory directors view bankruptcy proceedings with trepidation.

But the most significant thing setting Nizhny apart from other regions is industrial production. While Russia is struggling to stem the drop in industrial production, Nemtsov says output in Nizhny rose 2 percent in May over the same month in 1992.

The statistics may give reason for hope, but before the region turns a corner it will have to deal with several strategic problems, the governor says.

Nemtsov and his advisers, for example, are not satisfied with the privatization process.

They say enterprises cannot be considered truly privatized until a mechanism, such as a stock market, exists to trade shares publicly. ``What we have is more collectively held property than private property,'' says Sergei Ivanenko, an economist at Yavlinsky's Epicenter think tank.

Mr. Ivanenko says another daunting task will be dismantling the Communist-built system that makes industrial enterprises responsible for financing social infrastructure, such as housing and schools. Such obligations force industry to divert resources badly needed for modernization to the social sphere.

``It will be a difficult step politically because we are all used to cheap housing and other social benefits,'' Ivanenko says. ``It will take a long time ... but the whole nation must do this.''

According to Lisov, Nemtsov's aide, solving the remaining problems depends on reducing government's role in the economy. A top priority is to reshape popular attitudes long used to taking orders instead of relying on individual initiative. ``The people are used to the government taking care of them,'' Lisov says. ``We must break down this psychology.''

But no matter how much it advocates deregulation, the Nemtsov administration still must frequently intervene in the developing market. That is because Nemtsov says he still cannot trust some conservative industrial managers who enjoy virtual monopolies.

``This is very difficult for us,'' Lisov says. ``Nemtsov says we shouldn't interfere in the economy on the one hand. But on the other we don't have a real market economy yet.''

If the regional obstacles can be overcome it could have nationwide ramifications, says economist Ivanenko.

``Nizhny Novgorod is a typical defense-oriented city,'' he says. ``If we can solve this city's problems it may provide an example for Russia in general.''

As for his own role, Nemtsov claims rapid reforms in Nizhny could collapse if he were to leave office. But he adds that if the present course continues for another 12 months, then the local market transformation would no longer depend on the regional leader personally.

``Even within the current administration there are a lot of problems. But I think that within a year, if I were to leave office, no one would notice,'' the governor says.