Recession for Russia? Sounds Like Good News

What would look like a recession in the West, feels like relief in Russia.

After seven years of retrenchment, the Russian economy finally looks poised for turnaround.

For the first half of this year, says a Western economist, the Russian economy continued to contract, but only by 1.1 percent.

"The downturn in the Russian economy has been stopped, and the mark when production can grow has been attained," President Boris Yeltsin said in a radio address this month.

It marked Mr. Yeltsin's first claim to an end to the precipitous decline in Russia's economy.

Inflation has moderated. Tax reform is pending, and that ultimate indicator, investment, is on the rise. Moscow's stock market is up 160 percent this year.

These trends are significant, not only for their positive impact on political stability but for the well-being of the Russian people.

Since 1990, most have suffered through a slump far worse than America's Great Depression. Economic output plunged 40 percent, by one estimate, compared with a 30 percent US decline between 1929 and 1933.

Many American experts agree with Yeltsin's cheerier outlook.

"The free fall of the economy has ended," says Matthew Sherwood, an economist with PlanEcon, a Washington firm.

He calls the 1.1 percent decline "easily the best six-month performance since the fall of communism."

Better yet, he sees a flat economy in the second half and true growth in 1998.

"Everything seems to be coming together now," says Anders Aslund, a former economic adviser to Yeltsin.

"We don't disagree. The economy is going to turn around in 1998," Yevgeny Yasin, former Russian economics minister, recently told Marshall Goldman, a veteran expert on the Russian economy.

The question of growth is not as simple as it might sound. Russian statistics are poor. Many companies, especially in services, dodge taxes by not reporting income to the government. Official statisticians estimate this vibrant shadow economy at 25 percent of national output. Others put it as high as 50 percent.

One key factor in the government budget has been an enormous decline in military spending. The military now soaks up a scant 3 percent of Russia's output, compared with about 25 percent in the Soviet era.

And more cuts are coming. Last week's marching orders from President Yeltsin called for trimming the armed services by 500,000 people, to 1.2 million.

Just back from a trip across Russia, Mr. Goldman, a Wellesley College professor, found Moscow booming. "It is a nice city," he says. "It's bright, painted. The scaffolding is gone. It is lit up at night now. It looks like parts of Vienna. It is almost user-friendly."

Moscow, with 5 percent of the nation's population, consumes 25 to 30 percent of its output, Goldman says. But many other cities and regions still struggle with economic devastation.

Last year the International Monetary Fund approved a three-year, $10 billion loan to Russia. An IMF team, due in Moscow today for a review, is expected to recommend releasing $700 million, the second phase of the loan.

Other signs of progress:

1. Lower inflation for the 22nd straight month to about 14 percent from 180 percent in 1995.

"That is quite an accomplishment," says Sherwood.

2. Tax reform, now under consideration by Parliament, would reduce the number of taxes from at least 75 to 28.

Economists see the failure of the government to collect adequate revenues as a major problem. Its state employees don't always get paid.

The tax legislation, expected to be passed later this year, will reduce taxes on business profits and make the 22 percent value-added tax fairer.

"These are substantial improvements," says Mr. Aslund.

3. The government and business have been able to borrow billions in the West.

Russia still faces significant, entrenched obstacles. Goldman calls it the "worst" of both capitalism and communism, with Mafia-type enterprises and massive bureaucracy. He says privatization of government-owned industry involved "virulent theft" by former communist bosses.

Aslund foresees Russia's economy becoming more "old" Latin American than West European. The government takes only 25 percent of economic output, compared with 50 percent in Western Europe. But an over-staffed public sector functions "badly."

Overall, though, the experts see Russia's economy as "messy" but making progress.

"It depends totally on what economic policies are incorporated by the government," Aslund says. "In general I would expect problems to be tackled."