Tunnel is longer, but light still on

Russia is on its fourth premier after a year of upheaval. But the news isn't all bad.

One year after the bottom dropped out of its economy and the ruble nearly evaporated, Russia is still mired in crisis but - surprise - doing far better than anyone predicted.

The dire fallout from the Russian government's sudden decision to default on its domestic debts on Aug. 17, 1998, triggering the collapse of the country's infant banking sector and 70 percent ruble devaluation, still dominates the lives of the majority of Russia's citizens.

The popular mood remains grim. "Due to the crisis, the light at the end of the tunnel has been switched off," runs a current joke.

But it may be that the tunnel only got a bit longer. Russians, though battered, have survived the crash, and a few industries are rebounding smartly.

If the country can get through the next year and elect a forward-looking new parliament and president, the outlook may even turn bright.

Many analysts say the worst thing about the crisis is not the economic hardship, but the ongoing turmoil and uncertainty caused by President Boris Yeltsin's repeated government shake-ups. He has fired three prime ministers since the crisis began. The fourth, Vladimir Putin, was confirmed yesterday by the Duma, the lower house of parliament.

"Nothing has done as much harm to Russia's ability to deal with its problems, and its reputation in the world, as the constant disruptions at the top," says Mikhail Dimitriev, an analyst with the Carnegie Endowment in Moscow.

"Ultimately, I think we must await a change of power in the Kremlin before we get a real strategy for reviving the Russian economy," he says.

Following Monday's confirmation vote, Mr. Putin pledged to stick with the previous government's economic policies and to strengthen social policies to aid the poor.

"We will continue reforms started by previous Cabinets," Putin said. "But the reforms aren't a goal by themselves, they must improve peoples condition."

It's not hard to see how Russians are still struggling with the crisis. Everyone has a story.

"I lost my savings, my job, my car, just about everything I'd gained in the previous five years," says teacher Katya Milyukina. Her bank, one of Russia's biggest, closed its doors after the crash, taking her $3,000 nest egg with it.

The private school where she taught English shut down when most of its young professional clients stopped coming. She sold her car to make ends meet.

"I'd like to say I've gotten over it, but I can't," she says. "I can only say I'm surviving."

Most Russians today are in that category, and some just barely.

Ruble devaluation cut deeply and immediately into living standards in Russia's heavily import-dependent consumer economy. According to official statistics, the number of people living below the subsistence line leapt from 22 percent of the population in July 1998 to 35 percent - 55 million people - in June 1999.

"The government defaulted on its debts, but really it just transferred the burden to the population in the form of lost savings, price inflation, and unpaid wages," says Boris Grinchel, an analyst with the Institute of Social and Economic Research in St. Petersburg.

Decimated middle class

The hardest blow fell on the new middle class - young professionals, entrepreneurs, and skilled workers who are Russia's best hope for building a modern society. In a matter of weeks, hundreds of thousands of them lost their jobs, their dreams, and their faith.

"Until confidence and purchasing power return to the middle strata of our society, there will be no speaking of recovery," says Mr. Grinchel.

Russia still has no functioning banking system, and the national savings rate is just one-third of what it was a year ago.

Strikes by disgruntled workers are sharply on the upswing. Some regions of the far-flung Russian Federation are visibly teetering on the verge of anarchy - notably the southern republic of Dagestan, where Islamic militants are waging war against the Russian Army.

But contrary to many harsh forecasts of a year ago, Russia has not disintegrated, suffered mass starvation, or drifted into dictatorship. At least not yet.

"It's a big accomplishment that we've held things together," says Mr. Dimitriev. "We're not out of the woods, but we're not dead either."

Positive signs

And there are at least a few unexpected rays of light.

Domestically produced consumer goods, from household appliances to clothes to shampoo, have become far cheaper in relative terms than the imports that formerly dominated the local market. A Russian-made Volga automobile that cost the equivalent of $12,000 a year ago can now be had for $5,000.

"Now is the time to build a house," says Maxim Sukharov, a lawyer. "Life is hard these days, but we'll never again see such low materials and labor costs." Mr. Sukharov says he is constructing a four-bedroom bungalow in a village 50 miles from Moscow for an estimated $7,000.

Russian industrial output rose 5 percent in the second quarter of 1999, according to the International Monetary Fund (IMF). The Russian government is even more upbeat, saying that production in July this year was 11 percent higher than the same month in 1998.

Exports have grown modestly, but imports have shrunk by a whopping 46 percent, giving Russia a trade surplus of $14.8 billion for the first half of this year - 15 times greater than the same period last year.

The global price of oil, Russia's biggest hard-currency export, has surged from less than $10 per barrel in February to above $20 today. That's a windfall not only for Russian oil companies, but also for the cash-strapped government, which will rake in an additional $1.5 billion in oil export duties this year. Tax collection, a perennial problem for the government, also appears to be improving, though it remains well below targets.

Major reforms still needed

But analysts warn the mini-recovery will run out of steam unless it is soon coupled with major structural reforms.

"Most Russians are not paying the full cost of their housing or the energy they use, and this remains a huge burden on the economy," says Grinchel, pointing to the fact that more than half of all Russian regions regularly default on their gas and electricity bills.

"Many industries are not positioned to take advantage of the ruble devaluation because they are crippled with debt and failed over the past several years to reorganize and retool for market conditions. There will probably have to be a wave of bankruptcies," Grinchel says.

"It may get worse before it gets better."

(c) Copyright 1999. The Christian Science Publishing Society