Source: Carnegie
The current American perception of Russia is a hopelessly corrupt country with an economy that is going from bad to worse, as if the financial crash of August 1998 happened yesterday. However bad that crash was, the last year has seen a lot of positive changes in the Russian economy.
A frequently-cited statistic is that the average life expectancy for Russian men has declined to 57.7 years, but that was in 1994. Since then, the life expectance for Russian men has increased by 10 months a year to 61.8 years in 1998, but this freely-available statistic that contradicts standard prejudices is never cited. How could anything improve in Russia?
For 1999, the usually judicious IMF had forecast that the Russian gross domestic product would slump by 9 percent, but it grew at approximately two percent and industrial growth topped eight percent. The pro-government parties could not have gained a near majority in the recent parliamentary elections, if the Russian voters had not felt much better about their economy, as opinion polls have indicated.
Even when economic growth is recognized, it is dismissed as merely an effect of the large devaluation in August 1998 and higher oil prices. However, substantial structural economic changes have occurred in the Russian economy. The much-publicized "virtual economy" is dwindling, and Russia is going through a swift monetization. From August 1998 till August 1999, barter dropped by one-third. Arrears of most kinds have fallen by at least one-half.
After all, the European Bank for Reconstruction and Development reckons that Russia has done almost as much systemic reform as the successful reformers Latvia and Lithuania, and sooner or later the results are likely to emerge. The financial crash seems to have been a catalyst for more profound economic changes. By imposing hard budget constraints, it convinced many Russian businessmen that they could no longer live on the state but had to make real money on the market.
A persistent myth is that Russia cannot collect enough taxes or balance its budget and that the federal government is losing power to the regions. In fact, Russia's total state revenue was 31 percent of GDP in 1999, nearly equal to the revenue collected in the United States. Considering the poor quality of the Russian state apparatus, that is too much. Last year, Russia actually attained a primary government surplus of two percent of GDP.
The only major budget problem is the old Soviet debt. The West should write off up to half of it, when the success of Russian market economic reform is secured, as for Poland and Bulgaria. The London Club for private debt negotiations is well under way to do so. The Western governments should do so in the Paris Club in due time.
Nor is the federal government losing economic power to the regions. On the contrary, federal government revenues rose from 9 percent of GDP in 1998 to 13 percent in 1999 largely at the expense of the regions.
A low-water mark in the current US debate on acting President Vladimir Putin has been a flimsy assertion that he would be Russia's Milosevic, who runs a tightly state-controlled economy. Putin has already made numerous statements about economic policy, and he talks about a normal market economy. He came to Moscow in 1996 at the behest of the reformer Anatoly Chubais, and his current confidants and appointees on economic policy are also Chubais allies. While Putin talks about a strong state, he simply seems to mean a functioning state.
It has also been claimed that the new Duma implies no political improvement and that it will not be able to carry out substantive reforms. Yet, the old Duma featured a Communist majority, whereas Communists will hold around 32 percent of the seats in the new Duma. President Boris Yeltsin fought for years for the legalization of private ownership of land, but the Communist Duma majority defeated him. Now, the Communists can no longer block a good land code.
The tax system is widely perceived as the biggest hazard in the Russian economy. Today, everybody agrees on the need for a major liberal tax reform, which would cut the number of taxes, the highest tax rates, and loop-holes, while simplifying the tax system. It is likely to be legislated this year.
But what about the Bank of New York scandal? Well, have US media ever written so much about so little substance? No significant money laundering has been evidenced. As the Russian bank system is really bad, both honest and dishonest Russians keep their money either in dollar cash or in renowned international banks, which the Russian authorities sensibly accept. Certainly, Russia should invite a large number of international banks to improve the situation, but at the Central Bank an old Soviet Chairman installed by the Communists resists.